Occidental Petroleum (OXY)

Materials Read:

The Economics of Oil and Gas, Mu 2020

Introduction To Carbon Capture And Sequestration, Smit et al 2014

The Moral Case for Fossil Fuels, Epstein 2014

Petroleum Economics and Risk Analysis, Cook 2021

Preparation Time: ~63 hours

Thesis: At an equity valuation of $51.2B, Virtue Capital Group purchased a significant position in Occidental Petroleum for its key roles in ushering in a new era for clean energy, underlying exceptional business economics, and synergistic relationships between management and stakeholders.

Occidental Petroleum historically built itself on the ability to locate, extract, refine, and sell oil. Its future looks starkly different. Today, as investors we find ourselves in a unique transition period where the imperative to be environmentally conscious is increasingly paramount, yet we remain deeply reliant on oil as a fundamental component of our energy and industrial infrastructure. Occidental Petroleum, a global energy company, has been actively engaged in environmental initiatives to address the challenges of sustainability and climate change. Notably, the company has been a pioneer in implementing carbon capture and utilization (CCU) technologies, which involve direct-air carbon dioxide capturing (DAC) of emissions and repurposing them for beneficial applications. At the time of writing, Occidental Petroleum projects its current DAC plant, which is still under construction in Ecton County (TX), to be able to capture over 500,000 metric tons of carbon per year beginning in 2025. In comparison, there are eighteen currently operational DAC plants globally, collectively capturing 10,000 metric tons of carbon each year as of 2021. Already, large name players such as Amazon have signed contracts for Occidental Petroleum to begin capturing carbon on their behalf as there is an increasing push for public companies to become carbon neutral. Additionally, Occidental has shown an emphasis on responsible drilling and operational practices, striving to minimize ecological disturbance and reduce the environmental footprint of its operations. For instance, in one of their drilling operations, they implement advanced technologies like horizontal drilling and hydraulic fracturing, which allow them to access energy resources with fewer surface disturbances. The company is also diligent about water management, recycling, and reusable drilling byproducts, which conserve valuable resources and lessen environmental impacts. Moreover, Occidental invests in state-of-the-art monitoring systems to detect and prevent any potential leaks or emissions, ensuring the protection of surrounding ecosystems and communities. Lastly, part of Occiental's surveying practices serves to assess the impact on the habitat of wildlife, and Occidental works with local ecological groups to steer its business operations clear of endangered and sensitive species. By embracing these sustainable drilling practices, they not only safeguard the environment but also set an example for responsible energy production in an era where environmental consciousness is crucial.

Occidental Petroleum recently (2019) acquired Anadarko and its vast resource-rich assets, particularly in the prolific Permian Basin. This acquisition expanded Occidental's footprint, enabling the company to tap into one of the most productive oil and gas regions in the United States. What sets Occidental apart is its diversified-yet-integrated approach to the energy sector. Beyond oil extraction from its high-quality assets, the company is engaged in chemical marketing (typically seen as a byproduct of tertiary oil extraction), midstream transportation of hydrocarbons, and the aforementioned direct air carbon capture business, showcasing a versatile portfolio. This diverse business model allows Occidental to be one of the most efficient domestic oil producers in the nation. The company is not solely dependent on traditional oil revenues, which tend to be more volatile. This strategic diversification and technological innovation contribute to a lower breakeven per barrel for Occidental Petroleum, making it well-positioned to capitalize on higher global oil pricing set by the Organization of the Petroleum Exporting Countries (OPEC). In comparison to its peers, Occidental accounts for higher gross margins and higher quality cash flows, making for a compelling investment.

Vicki Hollub, the CEO of Occidental Petroleum, is widely recognized for her down-to-earth leadership style and a strong focus on shareholder value. Her pragmatic and approachable demeanor sets her apart in the often-stoic world of corporate leadership. Under her stewardship, Occidental Petroleum has newly implemented a shareholder-focused management approach that aims to balance the interests of investors with long-term sustainability goals. One notable instance that underscores Hollub's innovative approach was her strategic move to secure financing for the acquisition of Anadarko. After hearing that a competitor was in a better position to close Occidental out of the deal, she looked to Warren Buffett's Berkshire Hathaway for a substantial investment to make the deal a reality. Berkshire provided $10B of financing in the form of 8% preferred notes, due at 105% of face value in 2029. Additionally, Berkshire negotiated the ability to exercise purchase warrants on eighty million common shares at a price of $62.50 on or before the expiration of the preferred notes. Creatively written into this agreement were the terms that Occidental Petroleum cannot begin to redeem these 8% preferred notes early unless the company is able to return $4 per common share on a trailing twelve-month basis. Since the initial acquisition, Occidental Petroleum has been able to redeem $1.379B of preferred shares despite the volatility of oil pricing through pandemic-era times. Conveniently, Warren Buffet and Vicki Hollub have grown their relationship beyond a simple financing deal, with Warren calling Vicki on her cell phone to give a fair warning he was about to make an investment. Berkshire Hathaway began purchasing Occidental Petroleum's common stock in early 2022 and now owns approximately 24.9% of the common equity. This out-of-the-box thinking, execution, and management showcased her ability to not only think creatively about solutions but also to build strategic partnerships to drive Occidental's growth along the way.

Factoring all of the above on the back of our robust fundamental analysis and valuation, Virtue Capital Group has announced its strategic investment in Occidental Petroleum, with a clear and steadfast commitment to holding the company as a potential lifelong business partner.

Warmly,

Zach Terpstra

Principal