Warren Buffett's company, Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B), owns lots of stocks. Occidental Petroleum(NYSE: OXY) ranks among its top holdings. It's currently Berkshire's sixth largest holding at 4.2% of its investment portfolio. Warren Buffett's company owns 28% of Occidental's outstanding shares and has regulatory approval to boost the position up to 50%.
Buffett sees Occidental as a potential "forever" holding, and his company should benefit from the earnings growth the oil stock sees ahead. Multiple catalysts could boost its free cash flow by more than $2 billion annually by the second half of 2026.
A needle-moving deal
The biggest near-term earnings catalyst for Occidental is its pending acquisition of CrownRock. Last December, the company agreed to acquire the privately held oil company for $12 billion. The deal will enhance its already strong position in the Permian Basin.
CrownRock will add 170,000 barrels of oil equivalent per day to Occidental's output. The high-margin, lower-decline production will boost Occidental's annual free cash flow by around $1 billion. That assumes oil averages around $70 a barrel, well below its current level near $80. It will produce even more cash if crude remains at its current level or keeps rising.
Even at $1 billion, CrownRock would provide a meaningful boost to Occidental, which generated about $5.5 billion in free cash flow last year. That incremental cash flow will give the company more money to allocate toward creating shareholder value, like repaying debt, investing in expansion projects, and returning cash to investors through higher dividends and share repurchases. It has already boosted its dividend by 22% in anticipation of the additional free cash it will generate from the deal.
Boosting its non-oil earnings
Occidental Petroleum makes most of its money by producing oil and gas. The volatility of commodity prices can have a meaningful impact on its free cash flow. For example, it generated $720 million of free cash flow in the first quarter of this year, down nearly $1 billion from the year-ago period.
While its cash flow will always ebb and flow with commodity prices, it expects to deliver over $1 billion of incremental annual free cash flow from sources beyond oil and gas by the second half of 2026. That will put a firmer floor under its earnings and reduce its overall volatility.
This year, it should capture a quarter of that total, primarily from its equity investment in Western Midstream Partners (NYSE: WES). The master limited partnership (MLP) closed several transactions to reposition its portfolio and capital structure. That has given it the cash flow and financial flexibility to boost its distribution by 52% this year. As its largest investor, Occidental will collect the majority of the incremental income. It expects to receive about $240 million of additional cash each year from its MLP.
In addition, Occidental's wholly owned midstream business will benefit from contract expirations over the next few years. That should drive sustained cost savings, boosting its annual free cash flow by $400 million by 2026.
The company expects to use some of its incremental free cash flow to repay debt as it matures, reducing its interest expense. It plans to retire $3.7 billion of debt through 2026, cutting its annual interest expense by $180 million and boosting its free cash flow by a similar amount.
Finally, Occidental has invested heavily in expanding its chemical operations, called OxyChem. Projects to enhance existing plants and modernize and expand its Battleground facility will supply it with growing earnings and free cash flow over the next several years. The company should see about $325 million of additional annual free cash flow from OxyChem by 2027 as its projects come online through mid-2026.
Multiple cash flow catalysts
Occidental Petroleum expects several drivers will add over $2 billion to its annual free cash flow by the second half of 2026. That's without any help from higher oil prices, which could give it an even bigger boost. The company can use that free cash flow to return more money to its shareholders. This combination of rising cash flow and cash returns could create a lot of value for investors, including Buffett's Berkshire, over the next few years.
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Matt DiLallo has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
