The Occidental Petroleum NYSE: OXY investment thesis has been getting more bullish over the last two years, setting the stock up for a substantial rally. Q4 results aside, the market appears ready to rally now and may move higher soon. The technical setup is solid, with the price action at rock bottom, stochastic firing a strong signal and MACD ready to follow. Assuming the market follows through on this signal, it could advance 15% to 30% with a chance of setting new highs before mid-year.

There is a risk that OXY shares could fall through support at $58, but it is unlikely for two reasons. The first is that analysts continue to support the market despite lowering their price targets. The consensus is down compared to last year but is still 22% above the price action, and there is a floor in sentiment consistent with the price action. The analyst’s lowest target is $59, suggesting this stock is in deep value territory.  The most recent revision, issued after the Q4 results, is from Stephens, reiterating an Overweight rating and a $74 price target. 

The second reason OXY is unlikely to fall below substantially below $58 is Warren Buffett. Mr. Buffett and Berkshire Hathaway have been buying this stock when it reaches current levels; the latest was in December last year, and more purchases are expected. At last count, Berkshire owned 25% of the diluted company with authorization to buy up to 50%. Berkshire is buying OXY because the cash flow is robust, and management is leaning into strengthening the balance sheet and realigning it in favor of common stockholders. 

Occidental Petroleum has a better-than-expected quarter

Occidental Petroleum posted a contraction in revenue and earnings compared to last year due to the deleveraging of oil prices. However, the 9.6% decline is 960 bps ahead of the Marketbeat.com consensus because the average realized price did not fall as fast as analysts forecasted, and production is ramping. The company outpaced its production target midpoint by 0.6%, helping to sustain higher-than-expected revenue levels, with some strength expected this year. The company guides for flat production but may easily surpass it as it has done for the last several quarters. OxyChem and Midstream also performed above expectations. 

Margin also deleveraged on oil prices but surpassed expectations aided by volume. EBITDA and net income margins contracted by several hundred basis points but were less than expected, leaving cash, cash flow, and earnings above the consensus. The adjusted $0.74 diluted earnings beat by a nickel, with substantial margin improvement expected for next year. The company doesn’t give specific guidance; analysts forecast 7% top-line growth with earnings up 45%. 

Cash flow and capital returns are a priority for Occidental Petroleum 

Occidental focuses much of its cash on reducing debt to free up cash flow for additional shareholder returns. Efforts in 2023 included reducing the preferred share count, buying back common stock, reducing debt and building equity. Results include a 20% dividend distribution increase for 2024, a 2.3% increase in shareholder equity, and plans to reduce debt and preferred shares further as the year progresses. The long-term plan includes shifting its capital return focus to increasing the pace of repurchases as cash flow is freed.   

The technical outlook is favorable for this energy stock. The stock isn’t rocketing higher on the results, but support is solid, and price action is advancing. The 2.5% gain constitutes a trend-following signal on the weekly chart, but there are hurdles to cross. The stock is still below potential resistance at the 30-day moving average, which may keep it down or move sideways within its range. If the market can get above it and sustain support, the odds of retesting the recent highs and moving to new ones are high.

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