Global Decarbonization Will Erode Oil Revenues Despite Modest Upside

Key Takeaways

• The shift toward decarbonization and electric vehicles, along with tighter regulations, threatens Occidental's oil demand, profitability, and increases asset and compliance risks.
  
• Elevated debt from major acquisitions restricts growth investment, while chemicals oversupply and aging assets pressure cash flows and future production.
  
• Expanded carbon management initiatives and technology-driven efficiencies are diversifying revenue, reducing costs, and strengthening Occidental's financial foundation for sustained, long-term growth.

Catalysts

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

• Accelerating global decarbonization efforts and increasing adoption of electric vehicles threaten to structurally reduce long-term demand for oil, leaving Occidental exposed to falling revenues and the risk of stranded hydrocarbon assets as energy transition policies tighten worldwide.
  
• Persistent high debt levels, exacerbated by major acquisitions such as CrownRock and Anadarko, constrain Occidental's ability to fund growth projects, increase decarbonization investments, or support capital returns, applying ongoing pressure to net margins and limiting flexibility even as debt repayments progress.
  
• Expanding regulatory burdens and the prospect of higher carbon pricing are likely to raise compliance costs for Occidental, particularly as it increases capital spending on international and U.S. assets that may be subject to stricter emission rules, ultimately pressuring profitability and eroding future earnings.
  
• Persistent oversupply in the chemicals segment, compounded by new global capacity and heightened exports from China, are likely to keep realized prices and margins under pressure for the foreseeable future, reducing cash flow diversification benefits and lowering overall net income.
  
• Ongoing underinvestment in exploration and potential decline in reserve replacement rates, compounded by the growing maturity of Occidental's core assets in the Permian and Oman, raise the risk of declining production volumes and shrinking revenue streams over the longer term, even as operational efficiencies temporarily offset cost headwinds.

Occidental Petroleum Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Occidental Petroleum compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Occidental Petroleum's revenue will decrease by 1.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.4% today to 8.3% in 3 years time.
• The bearish analysts expect earnings to reach $2.2 billion (and earnings per share of $1.84) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 27.6x on those 2028 earnings, up from 25.4x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.1x.
• 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 rapid acceleration and commercialization of Occidental's Direct Air Capture and Carbon Management businesses are securing long-term contracts and benefiting from extended 45Q tax credits, which will unlock new, durable revenue streams and diversify the company beyond traditional oil and gas, potentially supporting both top-line growth and net margins for many years.
  
• Structural, technology-driven cost reductions throughout Occidental's portfolio, such as automation and AI adoption in drilling and operations, have resulted in sustained downward pressure on per-barrel costs, allowing for high production growth without increasing absolute operating costs, which can protect net income and free cash flow across commodity cycles.
  
• The accelerated pace of deleveraging through asset divestments and robust operating cash flows has enabled Occidental to repay $7.5 billion in debt, significantly lowering annual interest expense by $410 million and strengthening the balance sheet, which in turn improves the company's financial flexibility and supports long-term earnings stability.
  
• Critical conventional and unconventional resource bases, particularly in the Permian Basin and Oman, are benefiting from advanced EOR techniques and long-term contract extensions, providing high-margin production growth, improved capital efficiency, and a strong inventory of future development opportunities capable of sustaining and potentially growing revenue.
  
• Occidental's unique industry expertise and first-mover status in CO2 Enhanced Oil Recovery (EOR), carbon management technologies, and its leadership in securing commercial partnerships and government backing are positioning the company well to capitalize on global decarbonization trends, further supporting valuation multiples and long-term earnings.

Valuation

• The assumed bearish price target for Occidental Petroleum is $40.0, which represents the lowest price target estimate amongst analysts. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be $26.1 billion, earnings will come to $2.2 billion, and it would be trading on a PE ratio of 27.6x, assuming you use a discount rate of 7.6%.
• Given the current share price of $44.61, the bearish analyst price target of $40.0 is 11.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.