Occidental (NYSE:OXY) stock price struggles are over. The market corrected to long-term lows, aligning with Warren Buffet’s initial entries into the stock and is set up for a strong rebound. Factors pointing to such a rebound include the results, the balance sheet and capital returns, analysts' sentiment, and Mr. Buffett himself.
Regarding his activity, Berkshire Hathaway (NYSE:BRKa) made predictable purchases in early February that confirm the bottom indicated in December. The December bottom, coincidentally, was also caused by Berkshire’s buying activity. The February purchase is worth $35.725 million in shares and added incrementally to the holding, which stands near 29% of the company.
Occidental Petroleum Repositions for Profitable Growth
Occidental’s Q4 results reflect its portfolio positioning and cost-cutting efforts, revealing price-related revenue weakness offset by increased production and widening margin. The company’s $6.48 in consolidated revenue is down more than 9% YOY and missed the consensus by a solid 500 basis points despite increased production.
However, the adjusted earnings grew more than 500 basis points due to operational improvements and debt reduction, with margin strength expected to stick. The takeaway is that cash flow is improving, providing leverage for investors, as seen in the balance sheet.
Regarding cash flow, the company’s $3.6 billion in operating cash is solid. Operating cash in Q4 was more than 55% of the revenue, including operating capital and 47% without, with free cash flow running at 21.6%. The free cash flow allowed for substantial debt reduction and the company to hit its near-term $4.5 billion target, freeing up additional cash flow in future quarters.
Balance sheet highlights include increased cash, property, and total assets only partially offset by liabilities. The net result is a 12% increase in equity and an expectation for equity gains in 2025.
Occidental’s Dividend is Growing Robustly
The company’s dividend, with the stock at $49, is worth nearly 2% in annual yield, and the distribution can be expected to grow robustly. The 2025 increase is worth 9% to investors, and the payment is only 30% of the earnings, leaving ample room for future increases.
Dividend investors can profit from Occidental's steadily increasing payout over the next two to three years because the increase pace will likely accelerate. The expectation is that the company will increase the distribution to match the pre-pandemic levels, an increase worth more than 100% of the 2025 payment.
Oil prices are the headwind. WTI is trading at the low end of its established trading range, generally impacting Occidental’s revenue leverage and the oil industry. However, the oil price action in mid-February suggests a floor is in place, support is rising to higher levels, and a price rebound could begin soon. In that scenario, Occidental’s revenue headwind will turn into a tailwind, boosting an already robust cash flow and capital return outlook.
Analysts Reset Sentiment: Predict a 25% Upside From Critical Support
The analyst's sentiment trend played a role in Occidental’s share price decline, but the market has been set up to rebound. The sentiment trend includes numerous price target reductions, which present a headwind for stock price action, but the sentiment remains favorable. The 21 analysts tracked by MarketBeat rate the stock as a Hold with a Bullish bias.
The bias is due to the high number of Buy ratings, 33%, the low number of Sells, 10%, and the price target. The consensus price target has been steady in the low $60s since mid-2024 and predicts a 25% upside for the market relative to critical support targets. The critical support target is near $49 and aligns with a prior resistance point broken when Berkshire Hathaway started buying the stock.
The initial reaction was a price dip in premarket trading, which became a buying opportunity for early traders. The indication going into the open was for the stock to open above the critical support level and move higher because of converging technical signals, including the MACD and stochastic indicators.
The MACD and stochastic indicators show a strong bottom and entry signal, so the move could be substantial. The critical resistance target is near $51.85 and could be reached well before the FQ1 2025 earnings release. 