By Avi Salzman

Oil just had its worst month since 2020 -- but shares of Occidental Petroleum look like a buy.

After a massive run-up at the start of the Iran war, oil prices have been drifting lower amid signs of a possible peace deal that could lead to the reopening of the Strait of Hormuz. West Texas Intermediate crude, the U.S. benchmark, was on track Friday to fall 17% in May to $86.97 a barrel, while Brent crude, the global benchmark, was also off 17%, to $91.91, its worst month on a dollar basis in more than six years.

Oil stocks have come down too -- the State Street Energy Select Sector SPDR exchange-traded fund has dropped 4.5% this month -- on the assumption that when the war ends, the energy windfall will too.

That assumption is wrong. Oil pries will likely remain high regardless of whether a peace deal sticks. Unblocking the strait and restoring normal production in the Middle East will be a multimonth -- or multiyear -- process that will cost tens of billions of dollars. Even after production returns, oil will trade at a premium as countries restock their strategic reserves.

When oil prices are higher for longer, it's the "problem" stocks that tend to benefit most -- and few have been as problematic as Houston-based Occidental Petroleum, the U.S.'s fourth-largest oil producer. The company has been a laggard for much of the past decade due to poorly timed acquisitions that saddled it with debt. But Occidental, at 10 times expected earnings over the next 12 months, looks cheap relative to Exxon Mobil, Chevron, and ConocoPhillips, which have better balance sheets and higher valuations.

That makes Occidental an attractive fixer-upper. It has some exposure to the Middle East, where the war has impacted operations, but 83% of its production is U.S.-based, with particularly strong positions in the Permian Basin of Texas and New Mexico. New CEO Richard Jackson is expected to focus on boosting margins.

Higher oil prices will do much of the work. Barclays analyst Betty Jiang upgraded the stock to Overweight this week on the assumption that crude prices will reset after the war at an elevated level, averaging $90 this year, $80 in 2027, and $75 in 2028. At those levels, "leverage is becoming a non-issue" for Occidental, Jiang writes.

Occidental has already made considerable progress at chipping away its debt load, which ballooned over $40 billion following its purchase of fellow producer Anadarko Petroleum in 2019, and then rose to $28.9 billion after Occidental bought CrownRock, another producer, in 2024. The company has since whittled the debt down to $13.3 billion, nearing its target of $10 billion.

Jiang expects Occidental will produce enough cash in the next few quarters to hit its debt target and sock away enough money to pay off an $8.8 billion obligation it owes to Berkshire Hathaway. Berkshire provided some of the cash for the Anadarko purchase in return for preferred shares that came with a hefty 8% annual dividend. Occidental isn't planning to pay off the preferreds until 2029.

Every year, shareholders watch the company pay off banks and Warren Buffett -- to the tune of over $1.7 billion in 2025 -- while they receive slim dividends, costing less than $1 billion. But by 2030, Jiang says, the company could have no net debt, finally freeing up all that money that had been spent on its past mistakes. She sees shares rising 26% to $72 from a recent $57.

Occidental's years of problems have finally led to an opportunity.

Write to Avi Salzman at avi.salzman@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 29, 2026 14:23 ET (18:23 GMT)

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