Photo credit: Getty Images.
A bold investment in the oil industry
Daniel Foelber (Occidental Petroleum): Occidental Petroleum, also known as Oxy, saw a 4.4% increase in its stock price on Wednesday following the release of the exploration and production (E&P) company’s fourth-quarter and full-year 2024 results. Despite this uptick, the stock remains down by more than 15% over the past year.
The market reaction to Oxy’s quarterly net loss of $297 million may seem surprising, but investors likely anticipated worse results, considering the stock had been hovering near a three-year low before the earnings report.
While Oxy reported a $334 million asset impairment charge for its oil and gas segment, the overall business showed strong cash flow, with $1.4 billion in free cash flow before considering working capital.
Oxy met its short-term debt repayment target of $4.5 billion and announced a $1.2 billion divestiture for the first quarter of 2025. The company’s $12 billion acquisition of CrownRock in August 2024 expanded its oil and gas production portfolio and cash flow potential, although it also increased leverage on the balance sheet.
In January 2024, Oxy projected $1 billion in free cash flow annually from CrownRock alone, assuming a West Texas Intermediate (WTI) crude oil price of $70 per barrel. While this estimate appeared conservative at the time, current oil prices around $72 per barrel suggest a more challenging environment.
Due to its leverage, Oxy is somewhat sensitive to fluctuations in oil prices. The company had faced significant overleveraging leading into the COVID-19 pandemic, resulting in a sharp decline in its stock price. However, Oxy managed to reduce its debt as the industry recovered.
Nonetheless, the company’s leverage and total net long-term debt have risen again, albeit at manageable levels. Oxy has outlined plans to swiftly pay down this debt, but investors should remain cautious of its exposure to lower oil and gas prices.
For investors seeking an E&P company trading at multiyear lows, Oxy may present a compelling opportunity. Additionally, Oxy can serve as a source of passive income.
In its most recent quarterly report, the company announced a 9% increase in its quarterly dividend, raising the payout to $0.24 per share, resulting in a forward yield of 1.9%.
An attractive entry point for this energy company
Lee Samaha (Diamondback Energy): It has been a challenging year for oil and gas exploration and production firms, with Diamondback Energy’s stock declining by 10.7% over the past year. Despite this, oil prices largely remained in the $70-$80 range, never dropping below $65 throughout the year.
Such pricing is typically favorable for oil companies, including Diamondback Energy, enabling it to sustain its base dividend of
Diamondback is anticipated to generate substantial cash flow and return value to investors in the upcoming years. Analysts project free cash flow of $3.5 billion in 2024 and $5 billion in 2025, which amounts to almost 11% of the current market cap. This suggests the possibility of hefty dividends and value-enhancing share buybacks. Given stable oil prices, Diamondback appears to be a promising investment opportunity.
Meanwhile, Devon Energy offers a noteworthy dividend yield of 4.2% amidst a market where identifying quality dividend stocks can be challenging. Despite a decline in stock value due to falling energy prices, the company remains operationally sound. The recent acquisition of Grayson Mill Energy has strengthened Devon Energy’s position in the industry, while its conservative leverage approach provides financial stability. Trading at a discount to its historical cash flow multiple, Devon Energy presents an attractive buying opportunity for income-seeking investors.
In comparison, Occidental Petroleum is not among the top 10 recommended stocks by The Motley Fool Stock Advisor team. Investors should weigh the potential returns of other recommended stocks before considering an investment in Occidental Petroleum. The Stock Advisor service has a track record of outperforming the S&P 500, offering guidance on portfolio building and regular stock recommendations.
Scott Levine does not hold any position in any of the stocks mentioned. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
