Occidental Petroleum beats earnings estimates and pays off debt

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Warren Buffett probably liked

western oil
it is

report on second quarter results.

Occidental Petroleum (Ticker OXY), in which Buffett’s

Berkshire Hathaway

(BRK/A, BRK/B) is the largest shareholder, exceeded earnings estimates, paid off nearly $5 billion in debt and is now poised to return more cash to shareholders.

Shares of Occidental, however, are down 1.3% in after-hours trading at $64.20.

Occidental has repurchased $1.1 billion in shares through Aug. 1, with about half of that total in July and the other half in the second quarter. Berkshire’s holding of 181.7 million Occidental shares represented a 19.5% stake at the end of June. Occidental earned an adjusted $3.16 per share in the second quarter, above the consensus estimate of $3.03 per share and up sharply from 32 cents in the year-ago period.

Berkshire’s stake is expected to rise to 20% in the coming months as Occidental completes a $3 billion buyout program. A 20% stake would allow Berkshire to include in its profits a proportionate share of Occidental’s profits. This would increase Berkshire’s reported revenue by about $2 billion, although there isn’t a whole lot of money associated with that revenue.

“Oxy kills it by increasing book value per share,” says Cole Smead, co-manager of Smead Value Fund, a Western holder. “Where can you find a company whose book value is growing so rapidly.” He calculates that Occidental grew its net worth per share by about 11% during the period while earning outsized returns on equity.

Occidental’s strategy in recent quarters has been to use its strong free cash flow to pay down debt, which stood at $21.7 billion as of June 30, and to effectively transfer wealth to shareholders who own now a bigger part of the business. Smead and others think Berkshire CEO Buffett is happy with the strategy.

Berkshire owns the nearly 20% common equity stake, holds warrants to buy 83.9 million shares of Occidental at $59.62, and owns $10 billion of 8% preferred stock.

Going forward, Occidental will focus more on returning cash to shareholders than paying down debt. This may include a higher dividend, which is now low at 52 cents per year for a yield of less than 1%. Most energy companies return far more money to holders than Occidental.

In 2023, Occidental may be able to begin reimbursing preferred high-rate Berkshire. According to one formula, the company must begin repaying the preferred stock if it returns more than $4 per share to its common holders in any given year.

Investors will be interested to hear from Occidental CEO Vicki Hollub on the company’s conference call Wednesday morning to learn more about capital allocation, dividends, debt reduction, equity production, and more. energy and any clues to Berkshire’s intentions. Some think Buffett may want to buy the rest of Occidental after rapidly increasing Berkshire’s stake in recent months. Berkshire could not be reached for immediate comment.

Smead thinks Occidental stock, which has doubled this year and is the best performer in the S&P 500, still looks attractive. It now trades for just six times its earnings. “It’s obviously cheap compared to anything you can do with capital.” He values ​​it at around $100 per share and thinks Buffett might be willing to pay $90 per share for it.

Occidental is a major energy producer in the United States, obtaining about 80% of its daily energy production of more than one million barrels from the domestic market. And Buffett loves corporate America.

Write to Andrew Bary at andrew.bary@barrons.com