Permian Efficiency And CCUS Will Unlock New Horizons

Key Takeaways

• Efficiency gains, cost reductions, and strategic acquisitions are driving stronger margins, higher productivity, and enhanced earnings potential across Occidental's core operations.
  
• New carbon management initiatives and portfolio high-grading position the company for diversified, less cyclical revenue streams and strengthened capital returns.
  
• Ongoing industry shifts, regulatory pressures, financial constraints, and operational challenges threaten growth, profitability, and long-term sustainability for Occidental Petroleum.

Catalysts

Engages in the acquisition, exploration, and development of oil and gas properties in the United States and internationally.

• While analyst consensus sees operational improvements and cost reductions mainly supporting margins, the scale and pace of Occidental's efficiency gains-such as a 13% year-on-year reduction in Permian well costs, a 20% improvement in drilling speed, and $500 million in planned structural cost reductions-could drive a sustained step-change in company-wide net margins and free cash flow even at lower oil prices, creating substantial upside for earnings growth over the next several years.
  
• Analysts broadly agree the CrownRock acquisition will add high-margin, unconventional production, but they may be underestimating the potential; synergistic integration is already delivering better-than-expected cost improvements and productivity, setting the stage for above-consensus volume growth and significantly higher returns on invested capital which could materially boost revenue and earnings power as more synergies are realized.
  
• The rapidly accelerating commercial adoption of direct air capture and carbon management-evidenced by STRATOS' successful commissioning, multi-year credit pre-sales, and US policy tailwinds including expanded 45Q tax credits-could unlock an entirely new, high-margin business for Occidental, providing a diversified, scalable long-term revenue and EBITDA stream less sensitive to cyclical energy prices.
  
• Occidental's leadership in Enhanced Oil Recovery and CO2 infrastructure, combined with its dominant position in the Permian and new point-source carbon capture partnerships, uniquely position the company to capture value from a potential global undersupply of oil as spare capacity shrinks, supporting upward pricing pressure and the ability to sustain or grow production volumes for years, directly strengthening future cash flows and shareholder returns.
  
• Aggressive high-grading of the portfolio, rapid non-core asset divestitures (approaching $4 billion since 2024), and accelerated deleveraging (with $7.5 billion of acquisition debt repaid in just over a year) are transforming Occidental's financial structure, lowering interest expense by $410 million annually and paving the way for significant capital returns via dividends and share buybacks-outcomes likely underappreciated by the market.

Occidental Petroleum Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Occidental Petroleum compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Occidental Petroleum's revenue will grow by 4.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 6.4% today to 20.5% in 3 years time.
• The bullish analysts expect earnings to reach $6.3 billion (and earnings per share of $6.24) by about August 2028, up from $1.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, down from 25.5x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.6%, as per the Simply Wall St company report.

Occidental Petroleum Future Earnings Per Share Growth

Risks

• The accelerating global transition towards renewables, supported by climate policy and technological innovation, is likely to result in lower long-term demand for oil and gas and continued downward pressure on Occidental's sales volumes and pricing power, reducing long-term revenue growth potential.
  
• Rising ESG-focused investing, which often excludes or divests from hydrocarbon-intensive companies, could limit Occidental's access to financing, raise its cost of capital, and constrain its ability to fund future projects profitably, negatively impacting both net margins and available capital for shareholder returns.
  
• Increasing prevalence of carbon pricing mechanisms and stricter global emissions regulations presents the risk of rising compliance costs and the potential for Occidental's oil assets to become stranded, threatening asset values and returns on investment, which can erode future earnings and balance sheet strength.
  
• Occidental's high debt burden, accumulated notably through the Anadarko and CrownRock acquisitions, continues to pressure net margins through elevated interest expenses, while ongoing asset divestitures may reduce the company's ability to generate revenue from a larger resource base in the future.
  
• Heavy exposure to U.S. shale resources, especially in the Permian, where well productivity is likely to decline and water handling/disposal costs may rise, creates uncertainty around production sustainability and raises operating costs, leaving future earnings vulnerable to both operational and structural industry challenges.

Valuation

• The assumed bullish price target for Occidental Petroleum is $64.8, which represents two standard deviations above the consensus price target of $50.42. This valuation is based on what can be assumed as the expectations of Occidental Petroleum's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $30.9 billion, earnings will come to $6.3 billion, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $44.77, the bullish analyst price target of $64.8 is 30.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.