Occidental Petroleum (NYSE:OXY), a stock that has been made famous by Warren Buffett’s long run of buying up shares under practically all market conditions, has been rising as the conflict between Iran and Israel has heated up.
Shares of OXY were up almost 5 percent in June, though the stock still trades about 24 percent below its year-ago level. How high will OXY stock go now, and what impacts can investors expect to see from ongoing geopolitical tensions in the Middle East?
Parsing the Effects of Geopolitical Tensions
At the moment, the elephant in the room with regard to OXY or any other oil stock is the effect of the ongoing conflict between Israel and Iran on oil prices.
While oil prices have risen sharply on concerns about the conflict and its impact on the broader Middle East oil supply, there are so far no signs of significant disruptions to the region’s oil production and shipping. As such, the long-term impact on oil will largely depend on how the conflict develops from here.
The conflict’s affect on oil prices occurs in two ways, with one being comparatively minor and the other being quite major.
On the more minor side, there’s almost certain to be damage to Iran’s oil infrastructure if the conflict persists for more than a brief period. While this certainly would impact global oil prices, the effect would likely be modest. Iran produces just 4 percent of the world’s oil supply, meaning that even severe damage to its production capacity would likely produce only a moderate long-term price increase.
A much more serious crisis in oil supply could occur if Iran closes the Strait of Hormuz. In contrast to Iran’s small production, about 20 percent of the oil shipped in the world passes through this critical shipping point.
If Iran were to close the strait, it would produce an oil shipping chokepoint that could significantly disrupt global supplies. This, in turn, would almost certainly lead to a further spike in oil prices as the global economy priced in what could be substantial and lasting supply shortages.
While far more drastic, this outcome also seems far less likely. Even with the conflict between Israel and Iran intensifying and the United States leaning more and more heavily on Iran, Middle Eastern oil is still flowing more or less as usual. Analysts remain skeptical that Iran will close the strait, and it may not be wise for investors to bank on additional surges in oil prices just yet.
In either case, Occidental is likely a beneficiary of disrupted Middle Eastern oil supply to some degree. As a supplier with a large presence in America’s Permian Basin oil fields, Occidental can continue supplying oil from its domestic sources at more attractive prices.
Occidental’s breakeven point on its existing wells in the Permian Basin is in the low $30 range, giving it a substantial price advantage that new exploration generally can’t replicate. As such, the company is in an extremely good position to benefit from higher sustained prices in the event of lower Iranian production or even a price surge in the event of a closure of the Straits of Hormuz.
That isn’t to say, however, that OXY is without its exposure to the Middle East. The company has production sites in both the UAE and Oman, both of which would very likely be impacted if Iran decides to shut off shipping in the Strait of Hormuz. Even so, Occidental’s ability to produce oil domestically from low-cost wells in the Permian Basin could make it an attractive option for riding out heightened geopolitical tensions.
OXY Could Still Be a Decent Value Buy
Even with the share price moving higher on worries about the global oil supply, OXY is still trading at what appears to be a fair valuation.
The stock’s P/E ratio is currently 18.7, while its price-to-sales ratio is 1.6. While not especially low for the energy industry, this valuation does still appear to leave OXY room to move higher, especially in the event of higher sustained prices for its oil.
So, Where Does OXY Go From Here?
Right now, analysts have given the stock a consensus price target of $49.54, up about 7.7 percent from the last price of $45.35.
Damage to Iranian oil infrastructure will likely support higher oil prices by curtailing supply. Though the effect may be modest in the long run, Occidental seems to be in a good spot to benefit from even slight increases due to the low breakeven points of its US wells.
A much larger spike would likely occur if Iran restricted trade through the Strait of Hormuz, especially if the flow of oil through that chokepoint was cut off for very long. By some estimates, a closure of the strait could add as much as $31.25 to the price of a barrel of oil. This would send prices up into triple-digit territory for the first time since 2022. During that period, OXY shares tended to trade in the $60 and $70 range, suggesting that the stock could have substantial upside in the unlikely event that oil stops moving through the Strait of Hormuz.
The current spike in oil is a reversal in what has otherwise been a trend of declining prices. America’s tariff announcement on April 2nd sent prices tumbling, and much of the increase that the commodity has seen in the wake of Iran’s conflict with Israel has gone into making up the ground that it last after that announcement.
Even with that boost, prices are still a bit lower than they were at this time last year. As such, OXY may not increase much beyond its current price or may even give up some of its recent gains if the conflict in the Middle East resolves itself quickly.
With that said, OXY could be a solid stock to own even if the current conflict doesn’t result in higher oil prices over the long run. With a fair valuation and a base of low-cost Permian Basin wells, Occidental could be a good long-term holding in the energy sector. The stock also pays a handsome 2 percent dividend, and management likely still has considerable room for further dividend hikes in the years to come.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.