OXY is a buy with low confidence; DCF fair value of $106 vs current $61 implies 73% upside in 18 months.

Occidental Petroleum benefits from high oil prices, but it does not build its long-term success on these high prices. In fact, they do the exact opposite. They are trying to reduce their dependence on high oil prices by achieving a sustainable improvement in cash flow.

The company has outlined a clear roadmap to add $4 billion in sustainable cash flow annually by 2030, and it expects to achieve about 85 % of these improvements even with lower commodity prices.

But does all this make Occidental Petroleum stock a buying opportunity? Let's answer this question together. You can observe the cyclical nature of this industry by looking at Occidental Petroleum's revenues over the past 12 months.

Revenues have accelerated after several years of decline here.

Sales exceeded $35 billion in 2022 when the Russian invasion of Ukraine caused oil prices to soar. More recently, tensions between the United States, Israel and Iran have led to a rise in oil prices once again, which in turn has led to higher revenues for Occidental Petroleum.

With fluctuating oil prices and volatile revenues, Occidental Petroleum also experienced fluctuations in its profitability. The fluctuation in the operating profit margin can be clearly seen in this 10-year chart.

However, the company has recently maintained accelerating operating profit margins of 23%, reaching 38% in 2022.

It is reasonable to assume that if the company can achieve the cash flow improvements indicated by the management team, its operating profitability could remain above 20%, and even approach 40% by 2030.

For investors, it should be encouraging that participants in the oil and gas industry are not increasing their capital expenditures. They are not increasing their supplies as a result of these high oil prices.

In fact, Occidental Petroleum expects spending levels in 2027 to remain relatively stable compared to 2026. Therefore, they are not relying on these high oil prices to remain in the future.

They are only expecting to take advantage of these currently high prices without actually accelerating their investments in increasing production in the future.

The returns on invested capital were similarly volatile. This is an industry that requires huge capital investments. The management team anticipates billions of dollars in capital expenditures for 2026 and 2027, with those levels remaining relatively stable at around $5 billion.

But the return on investment (ROIC) for the industry and for Occidental Petroleum was not great even during boom times. The return on investment on capital barely exceeded 20%.

Based on the price-to-earnings ratio, Occidental Petroleum shares are trading at 15.9, which is close to the average valuation at which the stock has traded over the past several years.

It was lower at times and higher at others, but at around 16, I can say it was slightly below average, according to this rating scale.

However, given the sector's volatility, huge capital expenditures, less-than-profitability (where margins are never excellent), and the long-term trend away from consuming these types of fuels, it is not a very attractive valuation when measured on a forward price-to-earnings ratio basis.

However, I get the opposite viewpoint when I look at the valuation using the discounted cash flow model. That's because we don't look at profits, we look at cash flow. The sector anticipates and incurs significant depreciation and amortization expenses as a result of those fixed assets, and therefore the cash flow is now much more attractive compared to the profit picture, because profits include depreciation and depreciation is a non-cash expense.

The fair value I calculated for Occidental Petroleum is $106, compared to the current market price of only $61. Therefore, considering this difference, I calculate a 73% increase between now and the next 18 months for Occidental Petroleum.

However, there are significant risks associated with calculating this height. If the company fails to achieve these cash flow improvements, or if the price of oil falls significantly over the next few months or next year, the upside estimates may be much lower.

Therefore, I last assessed Occidental Petroleum more than a year ago on May 26, 2025, where I rated it as a buy opportunity but with low confidence and low conviction. Today I will repeat the same rating, which is a buy rating but with low confidence and low conviction.