Occidental Petroleum

Occidental reported adjusted EBITDA of $5.6 billion versus $4.7 billion S&P consensus. Production came in at 1,433 thousand barrels of oil equivalent per day, 23 mboe/d higher than guidance. Cost efficiencies also lifted performance.

Why it matters: Occidental's story has moved from leverage risk to cost and operational efficiencies. Management expects to drop three of 15 rigs later this year as improved cycle times and new well performance beat the plan. All that translates to a lower sustaining capital requirement. The explicit target is to push the required maintenance capital down to $4.5 billion per year from $5.4 billion in 2025. The direction of travel sounds correct. After refreshing our model with the most recent data, we see 2% annual production growth through 2028 even after shedding the rigs.

The bottom line: We are raising our fair value estimate to $62 from $55 after incorporating the most recent results and well data. About $2 was from this quarter's results, with the remainder tied to new well data from the Permian Basin. We still see shares as 3 stars, but under our fair value estimate. Our no moat rating, Poor Morningstar Capital Allocation Rating, and High Morningstar Uncertainty Rating are unchanged.

Key stats: The firm achieved its $10 billion debt target net of cash at the end of the quarter. With commodity prices elevated and share repurchases unattractive until the preferred equity is retired in 2029, a lot of cash will build on the balance sheet.

We raise our fair value estimate to $62 per share from $55 after incorporating the most recent results and well data. About $5 was driven by well performance, while $2 was from the quarter's results.

We assume oil (West Texas Intermediate) prices in 2026 and 2027 will average $81 and $72 per barrel, respectively. In the same periods, natural gas (Henry Hub) prices are expected to average $3.10 and $3.49 per thousand cubic feet. Terminal prices are defined by our long-term midcycle price estimates (currently $65/bbl Brent, $60/bbl WTI, and $3.70/mcf natural gas).

Our fair value estimate corresponds to enterprise value/EBITDA multiples of 4.8 times for 2026 and 5.7 times for 2027. Our production forecast for 2026 is 1,444 thousand barrels of oil equivalent per day. That drives 2026 EBITDA to $16.7 billion, with expected free cash flow reaching $8.7 billion in the same period. Our 2027 estimates for production, EBITDA, and free cash flow are approximately 1,470 mboe/d, $14.2 billion, and $7.6 billion, respectively.

Occidental Petroleum has no economic moat, in our view.

We generally assess moats for oil and gas producers based on the quality of the acreage, defined by breakeven price, or the oil price needed for new wells to be profitable. Lower breakevens allow for maintained or growing production in low-price environments while competitors curtail production. Accumulating prime acreage is done through two ways: entering a basin early, when the value is not wholly understood, or through acquisitions. The best returns are generated by early movers in a basin, but excess returns can result from acquisitions if made at the right time and price. Existing inventory can be upgraded as technical innovations are made, but these innovations won't be exclusive to one operator as they quickly spread through the basin.

After two major acquisitions—the Anadarko blockbuster in 2019 and CrownRock in 2024—Occidental has accumulated 20 years of inventory based on Rystad’s estimates and current production. However, the purchase prices left the firm with a large invested capital base. Subsequent sales of noncore operations have helped reduce the capital base, yet the capital drag remains. We would need to see a combination of lower operating costs and higher midcycle oil prices to award a moat to the segment.

Further impairing returns is the midstream and marketing segment, which contributes substantial assets to the capital base but has thin returns. We don't see a path for this segment to gain a moat.

Complicating the story is the firm’s push into carbon capture. Occidental is an oil producer that has invested heavily in carbon capture and sequestration. Oil customers are generally indifferent to carbon mitigation investments, but customers who find them interesting hesitate to associate with an oil company, preferring to highlight their relationship with Oxy's wholly owned subsidiary, 1PointFive.

Occidental has been investing in CO2 direct air capture and point source capture capabilities, with the goal of underground sequestration. The Inflation Reduction Act and One Big Beautiful Bill Act established and sweetened Section 45Q tax credits for the activity and allowed the use of carbon for EOR. The initial DAC plant in the Permian basin, Stratos, is meant as a proof of concept; the firm will refine plant designs before larger expansions. With five-year terms and an uncertain market value in the early 2030s, we ascribe no moat to the operation.

No further DAC facilities are under construction or have reached final investment decision, but land has been secured at King Ranch for a major expansion near the Texas Gulf Coast. Ultimately, the King Ranch facility could be 60 times the size of the Stratos and could be a mix of direct air and point source capture. Point source has been more economically viable due to lower operating and capital costs, but tax incentives are lower, and it is not as geographically flexible. In 2025, a point source joint venture with Enbridge achieved final investment decision, backed by a 25-year agreement for a blue ammonia production facility to capture and sequester the resulting carbon.

Occidental possesses substantial remaining inventory in the Permian and Rockies. These quick-cycle shale assets can be scaled quickly should commodity prices increase.

Oxy's conventional assets in the US and the Middle East complement its shale operations nicely by generating stable cash flows from assets with a much lower base decline rate.

The Low Carbon Ventures and 1PointFive subsidiaries meaningfully differentiate Oxy from peers and may support greater enhanced oil recovery in the future.

Occidental has the highest breakeven cost of remaining inventory in our North American coverage. This leaves it more vulnerable to price declines.

Management has a history of making poorly timed investment decisions that bloated operations and endangered the balance sheet.

Carbon capture and sequestration investments have been slow to materialize and require partners.