Occidental Petroleum (NYSE: OXY) is one of the largest oil and gas (O&G) producers in the US that also operates chemical and renewable energy subsidiaries. The company has often been surrounded by concerns about management inefficiencies linked to its diverse operations. However, a shift in core competencies a decade ago led management to acquire significant exposure to the Permian Basin for a discounted price. OXY offloaded low-margin assets at home and abroad during the acquisition of Permian Basin assets, which is the highest quality O&G patch in the US.

To understand the value of having assets in the Permian Basin, it is important to note how US oil production fell to 5,000 mbopd from a peak of 10,000 mbopd in the early 70s as reliance grew on conventional wells since the tech required for oil drilling in unconventional deposits like Permian’s deep oil reserves wasn’t yet feasible. The widespread use of vertical wells for oil extraction witnessed a shift in the early 2010s as technologies supporting unconventional horizontal drilling, lateral wellbores, and better fracking protocols for oil extraction from deeper shale became affordable. The trend dramatically reduced US reliance on foreign oil as the country now produces almost 13,000 mbopd, where the Permian Basin accounts for 30% of total production. Now that we understand how important the Permian Basin is to the O&G giants, it helps to know that OXY accounts for almost 10% of the oil produced from the basin. As a result of the massive exposure to Permian, the company was able to improve US mbopd production to 1,000 from 284 in the past decade through 2023 while global production remained flat. Furthermore, OXY’s per barrel operating costs also declined markedly to $35.42 from $44.94 as proved reserved increased to 4,000 mboe from 2,700. Here, we summarized a March 29 bullish thesis published by Mysticaldog86 on Value Investors Club.

The thesis sees the management-led shift in core competencies, commitment to reducing debt, potential stock buybacks, high-quality assets, modern extraction techniques, and a cheap valuation as catalysts to its growth story. An industry veteran with over four decades of experience at OXY, Vicki Hollub’s appointment as CEO in 2016 was soon followed by an aggressive approach to bolstering footprint in the Permian Basin. With previous experience as head of OXY’s Permian operations, Hollub moved fast with the acquisition of Permian producer Anadarko despite fierce competition from rivals like Chevron. Furthermore, she grabbed the opportunity to buy Oxy stock at a discount to intrinsic value in 2022 and 2023, buying back 8% of the shares outstanding. Hollub’s efforts to acquire another player in Permian’s Midland Basin called CrownRock further solidifies the company’s focus on doubling down on the basin. The move is also justified by OXY’s expertise in subsurface modeling and cutting-edge oil recovery methods that offer an edge in mapping, extracting, and recovering oil. They have efficiently leveraged these technological developments and their proprietary know-how to unlock value from Anadarko assets.

OXY also retains a market edge when it comes to extracting commercial amounts of hydrocarbons from wells using their CO2-enhanced oil recovery technique, which the company has strived to master over decades. Note that enhanced oil recovery techniques make it possible to extract between 75% and 80% of the trapped oil from conventional reservoirs where the extraction amount is only up to 40% using traditional techniques. Furthermore, enhanced recovery methods can increase extraction from shale by up to 18%. OXY is able to source and isolate CO2 from its carbon capture operations. The company recorded an almost $13 billion EBITDA in 2023 with nearly $27 billion in debt alongside Berkshire Hathaway’s preferred equity, making it reasonably leveraged during March. Meanwhile, debt and preferred equity could jump to $36 billion on the back of the CrownRock deal, which closed in August. Although OXY plans to aggressively lower debt to $15 billion in the next two to three years with the help of up to $6 billion in divestitures and cash flows, the thesis argues that risks around oil price volatility combined with OXY’s high financial leverage continues to suppress the company’s current valuation relative to industry peers. The integration of CrownRock with OXY and a lower debt burden by 2026 should help the O&G leader generate $8-$8.5 of midcycle FCF as the share price could touch $100 apiece.

OXY is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 62 hedge fund portfolios held OXY at the end of the second quarter compared to 61 in the previous quarter. While we acknowledge the potential of OXY as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as OXY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: This article was originally published at Insider Monkey