Occidental Petroleum Corp

Outside the circle: OXY's earnings depend on oil prices and a pending tax case that are hard to forecast

Occidental Petroleum, traded as OXY, finds, develops and produces oil, natural gas liquids (NGL) and natural gas, mainly in the Permian Basin, the Rockies, the Gulf of America and Oman. Its results follow commodity prices, and the filing says those prices are determined by market forces which are not in the Company’s control. The engine passes owner earnings, low capital intensity, the retained earnings test and the yield test, and fails consistent earning power, high return on equity, little or no debt and shareholder capital allocation. At a price of $62.38 against a base value of $64.42 per share, the margin of safety is only 3.2%, and the bear value of $28.52 is far below the price.

Occidental, known as OXY, finds, develops and produces oil, natural gas liquids (NGL) and natural gas, mainly in the Permian Basin, the Rockies, the Gulf of America and Oman. A midstream and marketing arm moves and sells its volumes and also serves third parties. Revenue at $21.6B comes almost entirely from selling commodities whose prices the company does not set. The OxyChem chemicals business was sold to Berkshire Hathaway and completed on 2 January 2026, so it is no longer part of the continuing operations.

• Oil and NGL prices, which set most of the revenue
• Volumes from Permian Basin, Gulf of America and Oman production
• Realised price differentials to WTI, Brent and Henry Hub benchmarks
• Midstream and marketing margins, which swing with regional spreads

Inside the circle? Most of the earnings depend on commodity prices that the company says it cannot control, and 3 of 15 years of filings show losses. Reserves must be replaced every year, and the tax and environmental matters are still open, so a ten-year view rests on many assumptions. The valuation of $64.42 against a price of $62.38 is only as good as those inputs, and the bear case is far lower.

What protects OXY's profits is mainly its asset base, not a franchise that customers choose. The filing says the company is one of the largest U.S. producers of liquids, and that its Permian EOR business is the industry leader in CO 2 flooding, which points to scale and infrastructure that rivals find hard to copy. The company does not set the price it receives, however, and its own table shows NGL realised at a much lower share of WTI than oil. Return on equity averaged 8.2% and fell to -56% in one year, which is the opposite of a business that holds its margins through the cycle. We think the protection is narrow and tied to the price cycle, and it would last only while the reserve base and infrastructure stay ahead of rivals. Gross and operating margin history and return on capital are missing from the filings we were given, so we could not run that cross-check.

Management has said it will use excess cash and divestiture proceeds to cut principal debt first, with share repurchases left as an option after that. The filing describes a dividend and an existing repurchase programme, but the balance sheet still carries total debt of $21.4B, so most cash is committed to deleveraging. The diluted share count has changed by 3.0% a year, so owners have not yet seen the per-share shrinkage that Buffett's test looks for. The annual report also uses promotional language about a unique shareholder value proposition and industry leadership, which you should weigh against the numbers. These excerpts do not show whether later buybacks would be made below intrinsic value, so that part of the test is unresolved.

• Management says it will use excess cash and divestiture proceeds to reduce principal debt before further share repurchases, which puts the balance sheet ahead of owner returns.
• The dividend is described as sustainable and growing, and the average dividend payout over the period is 40% of profit.
• The diluted share count has changed by 3.0% a year, so repurchases have not yet reduced the number of shares owners hold.
• Total debt of $21.4B and interest cover of 2.5× limit how much cash can be returned to owners until the debt falls further.

• FailsDemonstrated, consistent earning powerFails

  3 loss years across 15 years of filings.

  Why this test
• FailsHigh returns on equity without leverageFails

  Return on equity averaged 8.2%, reaching 15% in 3 of the years measured; the weakest year was -56%. Debt is high enough that some of that return is borrowed.

Buffett's first test is the circle of competence: can you understand the economics and reasonably estimate the future? OXY's economics are readable, but most of its earnings come from a price that the company does not set, and the filings give us no way to forecast that price with confidence. The engine's verdict of outside the circle follows from that. The principle of consistent earning power, which asks for demonstrated results and not projections, also fails, because 3 of 15 years show losses and return on equity fell to -56% in its worst year. The principle of high returns on equity without leverage fails too, since return on equity averaged 8.2% and total debt of $21.4B means some of that return is borrowed. The little-debt principle fails on interest cover of 2.5×. On the positive side, the owner earnings test passes, with free cash flow averaging 171% of reported profit, and the business needs little capital to keep going, with capital spending at 0.8× of depreciation. The retained earnings test passes, and the rates-are-gravity test passes narrowly, since the owner earnings yield of 5.4% sits close to the 10-year Treasury yield of 5.1%. Buffett's margin of safety asks you to buy only well below a conservative value, and at a margin of 3.2% the test is mixed at best.

• Principal debt against the company's stated target, and the pace of repayment from OxyChem proceeds

  Management says it will cut principal debt before any buybacks. Progress here decides whether the little-debt test can ever pass.

• Return on equity in each new annual report, and whether it stays above the level the engine treats as high

  The engine counts only 3 years at that level. A run of such years would be the first real evidence of consistent earning power.

• Realised NGL and oil prices as a share of WTI and Brent, and any hedging

  The filing shows NGL realised at a much lower share of WTI than oil, and no commodity hedges were in place at year end. Changes here show how much of the price risk the company is taking on.

• Reserve replacement and the share of proved undeveloped reserves converted each year

  The company must replace depleted reserves every year. Weak replacement would weaken the asset base that protects its profits.

• Tax Court ruling on the Tronox settlement deduction, and any repayment or accrual that follows

  The filing says a repayment of the tentative refund, with interest, could run to billions of dollars. An adverse ruling would hit cash and could change the balance sheet.

Questions the filings couldn't answer

• The filings we were given do not include operating income or invested capital, so return on capital cannot be tested.
• Total debt of $21.4B may predate the additional repayment made after year end. We need the balance sheet at the filing date to confirm the current debt load.