Occidental Petroleum (OXY -1.19%) is known for being a top portfolio holding of Warren Buffett's Berkshire Hathaway. But investors who have been paying attention to the oil patch for a while may also know it as one of the more aggressive exploration and production (E&P) companies in the U.S.
CEO Vicki Hollub has a reputation for fearlessly targeting acquisitions and ramping up fossil fuel production. Oxy outbid Chevron (CVX -0.91%) in 2019 to acquire Anadarko Petroleum, a move that initially backfired on it when oil and gas prices crashed in 2020. It took years for Oxy to restore order to its balance sheet. But it didn't take long for it to go for another big play: In December, it announced its plan to acquire privately held CrownRock for $12 billion.
Here's what you need to know about Oxy's fourth quarter and full-year 2023 results, its balance sheet, its recent 22% dividend increase, and whether the dividend stock is worth buying now.
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Oxy is putting up big numbers
What got Oxy in trouble in 2020 was that it had levered up its balance sheet and boosted production so that it could make a ton of cash if oil prices were high. This strategy left the company particularly vulnerable to low oil prices. Its strategy is pretty much the same today -- it's just that oil prices are higher now than they were then. Oxy can do quite well in the current price environment, with prices for West Texas Intermediate crude in the $70 per barrel to $80 per barrel range. Case in point, it booked $1 billion in profits in the fourth quarter.
In 2023, Oxy booked $3.77 billion in net income, or $3.90 in earnings per share (EPS). It produced 1.22 million barrels of oil equivalent per day (boe/d), an increase of 5.4% compared to 2022. That higher production helped drive profits. It reported an average worldwide oil price of $76.85 per barrel in 2023 compared to $94.36 in 2022. This price difference had a big impact on Oxy's performance. Profits were $12.5 billion in 2022 for EPS of $12.40 -- more than triple its 2023 profits.
For comparison, consider that ExxonMobil's (XOM -1.17%) profits were 57% higher in 2022 than in 2023, Chevron's were 68% higher, and peer E&P company ConocoPhillips' (COP -0.95%) were 70% higher. Compared to other companies, Oxy's strategy is much more dependent on higher oil prices. But when prices are high, it cashes in. Just one big year can go a long way. Its 2022 performance transformed the business, allowing it to pay down debt and get its balance sheet in a position to pursue the CrownRock acquisition.
A mediocre balance sheet
In the fourth-quarter presentation, management said Oxy had regained and reaffirmed an investment-grade credit rating. But the balance sheet isn't remotely close to being as healthy as oil majors like Chevron or ExxonMobil, or even many of its E&P peers.
Oxy paid $945 million in interest expenses in 2023. It finished the year with net long-term debt of $18.54 billion, a major improvement from $25.87 billion in Q1 2022. But still, that's a lot of debt for a company of its size. For comparison, ConocoPhillips has $12.3 billion in net long-term debt, ExxonMobil has $10 billion, and Chevron has more cash on the books than long-term debt.
ExxonMobil's acquisition of Pioneer Natural Resources and Chevron's acquisition of Hess -- both pending -- will be all-stock transactions. Oxy's deal purchase of CrownRock will be funded with debt. If oil prices stay high, then Oxy wins big. But in the meantime, it will once again lever up its balance sheet.
Specifically, it is financing the CrownRock purchase by incurring $9.1 billion in net debt and the assumption of $1.2 billion of CrownRock's existing debt. That total is more debt than it paid off between Q1 2022 and the end of 2023. In exchange, Oxy will gain 170,000 boe/d in low-breakeven price Permian production. It will also get plenty of acreage and access to proven reserves that should help it remain a top Permian producer for years to come.
An unreliable dividend
Oxy's big plays affect its balance sheet and its capital-return program. The company repurchases stock and pays dividends, but not nearly at the rates of many of its peers. It's also doubtful it will buy back a meaningful amount of stock again until it has integrated CrownRock.
Management recently raised the quarterly dividend by 22% to $0.22 a share, giving the stock a forward yield of 1.5%. Before the 2020 crash, Oxy paid $0.79 a quarter, but cut its dividend to $0.01 a quarter in 2020. It has since been building it back up. But it has demonstrated that those payouts are unreliable.
Unlike ExxonMobil and Chevron, which can lean on their strong balance sheets to support their dividends, Oxy is already levered up, so it has to either maintain a smaller payout or cut its dividends when oil and natural gas prices fall. And its dividend outlook has become even more uncertain since the announcement of the CrownRock deal.
Oxy's ideal role in a portfolio
What I love about Oxy is that it's a straightforward company. It's ultra-bullish on strong oil and natural gas prices, and it handles its spending, balance sheet, and mergers and acquisitions strategy accordingly. I expect Oxy to go full steam ahead when the energy market is good and get clobbered during downturns.
If I were building an oil and natural gas portfolio from scratch, I would center it around ExxonMobil and Chevron because they both have impeccable balance sheets, strong dividends that they have hiked every year for decades, diversified businesses, and downside protection in case energy prices fall. However, I would consider including Oxy as a role player in that portfolio because it has so much upside potential.
It's hard to know for sure, but I'd guess that's how Buffett and his team view Oxy as well. The vast majority of Berkshire's energy exposure is in relatively safe oil and gas and utility assets through Berkshire Hathaway Energy (BHE) and Chevron. Berkshire owns about $15 billion worth of Oxy shares -- or 28.3% of the company -- but it's only a fraction of the value of BHE, and is also less than Berkshire's $19 billion Chevron position.
If you don't care too much about reliable dividends and want a high-risk/high-potential reward bet on U.S. oil and natural gas production, Oxy could be worth it. But if you're interested in a safer way to invest in energy, it's probably best to go with ExxonMobil or Chevron instead.
Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Occidental Petroleum and Pioneer Natural Resources. The Motley Fool has a disclosure policy.
