Occidental Petroleum: Now At 3.5x Free Cash Flow, This Is Cheap

Summary Occidental Petroleum has seen its shares sell off together with the rest of the oil sector. Occidental carries approximately $24 billion of net debt. This is getting in the way of Occidental ramping up its capital return program. During Q1, Occidental's total shareholder yield was 3.6% on an annualized basis. Even if the capital returns increased, I don't see a path towards a meaningfully large increase. That being said, at 3.5x free cash flow, the business is clearly very cheaply priced. I rate this stock a buy. Looking for more investing ideas like this one? Get them exclusively at Deep Value Returns. Learn More » Investment Thesis

Occidental Petroleum (NYSE:OXY) is one of the big bets that Warren Buffett has made in oil and gas, alongside Chevron (CVX). Buffett had Occidental warrants with a strike price of $59.62 that he exercised. Additionally, Buffett made additional stock purchases that came at somewhere around ~$31 to ~$59 per share.

At the time of writing, Occidental's share price is $56, this is not looking too dissimilar to the range that Buffett made his purchases of Occidental's common. That's not to say that Buffett is right. He is human too.

That insight aside, I nonetheless believe that Occidental Petroleum is well-positioned for this strong oil environment, particularly now given the recent share price weakness.

I rate this stock a buy.

Occidental's Recent Performance

Above I've chosen a few peers to compare with Occidental. What you see above is indiscriminate selling. Investors are not considering near-term prospects, valuations, or anything else. Investors are simply crowing for the exits.

They may be right or wrong. However, I believe that they are wrong. But first, let's discuss the bear case.

The Bear Case to Oil Companies

There are two bearish considerations that I believe we should be mindful of.

Higher...