Western petroleum (NYSE:OXY)which is normally just called Oxy, is a major player in the energy sector. But if you compare it with the industrial giants, it is still a bit small. However, the company is working to expand its diversified portfolio. It seems like it wants to beat the big players ExxonMobil (NYSE:XOM). Is that realistic?
What does Oxi do?
Occidental Petroleum is an integrated energy company. That means it owns assets in the upstream (oil and natural gas production), midstream (pipelines) and downstream (chemicals and refining) segments. This is the same model used by some of the world’s largest energy companies, including US energy giants ExxonMobil and Chevron (NYSE: CVX). This diversification within the sector helps smooth out the ups and downs in a rather volatile sector.
Meanwhile, Occidental Petroleum’s asset portfolio is spread across the United States, the Middle East and North Africa. That’s not as diversified as some of its bigger brothers, but you have to start somewhere if you want to expand internationally. And at the end of the day, Oxy still has a truly international reach. In some ways it looks like a small Exxon or Chevron. The market cap shows how “small” Oxy is, with a still significant market cap of $50 billion, dwarfed by $550 billion Exxon and $270 billion Chevron.
That said, Oxy has shown a great willingness to take on the industry giants. Notably, it outdid Chevron to buy Anadarko Petroleum and eventually teamed up with Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) to finance the deal. Unfortunately, Oxy bit off more than it could chew, ultimately having to cut its dividend as energy prices plummeted in the early days of the coronavirus pandemic. Since then, the country has paid off its debts and made a more explicit commitment to financial prudence. Debt reduction was a major discussion point in the most recent, and much smaller, acquisition of Crown Rock.
Occidental wants to play with the big kids
Oxy’s business model is therefore comparable to that of giants such as Exxon and Chevron. It buys assets from under the giants. And when it’s not stealing deals, it’s buying assets similar to those the giants are eyeing. For example, Crown Rock is active in the US market, where both Exxon and Chevron have expanded their reach. Oxy actually wants to become one of the top dogs of the energy industry.
There’s probably room for that. The energy sector is in an interesting position today as the world increasingly uses cleaner energy sources such as solar and wind energy. But most industry watchers expect oil and natural gas to remain important to the global energy picture in the coming decades.
But material growth is unlikely to be in the cards from this point on, suggesting that the energy industry winners will be large and efficient players. That’s basically what Exxon and Chevron are.
Occidental Petroleum isn’t a schlub either, but there is clearly room to expand its operational scale. Acquisitions in a sector that appears ripe for consolidation should help it do this, which is why it is acting as a consolidator of the sector. In fact, it likely has more opportunity than its larger competitors because smaller deals are more meaningful to its business.
Overtaking is not necessary
To be fair, it seems unlikely that Oxy will ever overtake an industry giant like Exxon, noting that Exxon is also growing through acquisitions. But that doesn’t detract from the long-term opportunities an acquisition-oriented growth plan with Oxy can deliver. That said, there are risks to consider as the energy giant has overstepped its bounds in the past and investors ultimately suffered as a result (thanks to the subsequent dividend cut).
Conservative investors should probably stick with existing giants like Exxon or Chevron, but if you’re a growth-oriented investor willing to take on some extra risk, Oxy might be worth a deep dive as it tries to compete with the big boys.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Berkshire Hathaway and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Could Occidental Petroleum become the next ExxonMobil? was originally published by The Motley Fool
