Occidental Petroleum (OXY) FY2025 Earnings Quality Report

Grade: F — Major Red Flags

Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2026-02-18, FY ended December 31, 2025) + Yahoo Finance
Auditor: KPMG LLP — Unqualified opinion

One-line verdict: Occidental's cash flow quality is exceptional — CFFO/NI of 4.53x with negative accruals — but the single red flag that triggers the F grade is the critical C4 check: $2.0B cash covers only 8% of $23.4B total debt. The company is aggressively deleveraging (repaying "$4.0 billion of debt" in FY2025 with "an additional $5.4 billion" post-year-end from the OxyChem divestiture), which means the balance sheet at filing date is materially better than year-end numbers show. Net income fell 24% to $2.3B on lower crude prices, but operating cash flow of $10.5B remained robust due to high DD&A and noncash charges typical of E&P companies. The M-Score of -2.90 is clean. The real risk is the $334M Gulf of America well impairment and Berkshire Hathaway's preferred stock overhang with its $800M+ annual dividend obligation.

Metric	Result
❌ Red Flags	1 (Cash covers 8% of $23.4B debt — but post-year-end debt repayment of $5.4B improves this)
⚠️ Watch Items	0
Checks Completed	18/18
Beneish M-Score	-2.90 (clean; well below -2.22)
Auditor	KPMG LLP — Unqualified opinion

Three Segments, One Dominant Driver

OXY operates through Oil and Gas (primarily Permian Basin), Midstream and Marketing (including Western Midstream Partners, its MLP), and Chemical (OxyChem, divested post-year-end). Per the 10-K, "an Occidental subsidiary, Western Midstream Holdings, LLC, acts as the general partner of WES, a publicly traded master limited partnership."

The filing discloses a major strategic shift: "In 2025, the Company invested $5.6 billion in high-return oil and gas assets" while simultaneously preparing to divest OxyChem and using proceeds for debt reduction. Capital expenditures guidance for 2026 is "$5.5 billion to $5.9 billion."

Key Financials

Metric	FY2022	FY2023	FY2024	FY2025	Trend
Revenue	$36.6B	$23.2B	$22.0B	$21.6B	Post-boom normalization
Net Income	$13.3B	$4.7B	$3.1B	$2.3B	Declining with commodity prices
Gross Margin	48.2%	36.4%	37.7%	34.9%	Compressing
Net Margin	36.3%	20.3%	13.9%	10.8%	Sharply lower
ROE	44.2%	15.5%	8.9%	6.5%	CrownRock acquisition diluted equity
CFFO/NI	1.26x	2.62x	3.74x	4.53x	Extreme cash conversion

The widening gap between CFFO and net income (4.53x) is not a red flag for an E&P company — it reflects massive DD&A charges on the expanded asset base from the CrownRock acquisition. This is actually a sign of accounting conservatism: high noncash charges depress reported earnings while cash continues to flow.

Cash Flow: Deleveraging at Speed

Metric	FY2022	FY2023	FY2024	FY2025
Operating Cash Flow	$16.8B	$12.3B	$11.4B	$10.5B
CapEx	$4.5B	$5.7B	$6.3B	$6.4B
Free Cash Flow	$12.3B	$6.6B	$5.2B	$4.1B
Debt Repaid	—	—	—	$4.0B
Cash Balance	$984M	$1.4B	$2.1B	$2.0B

Per the 10-K: "In 2025, the Company used proceeds from divestitures and cash on hand to repay approximately $4.0 billion of debt. Subsequent to December 31, 2025, but before the date of this filing, the Company used proceeds from the OxyChem Transaction to pay or satisfy and discharge an additional $5.4 billion of debt." This means total debt has been reduced by approximately $9.4B from the year-end figure of $23.4B, bringing it closer to $14B at filing date.

The 18-Point Screening

Revenue Quality

#	Check	Result	Detail
A1	DSO Change	✅ Pass	DSO 44 days, -4 days YoY — improving
A2	AR vs Revenue Growth	✅ Pass	AR -9.3% vs revenue -1.9% — AR shrinking faster
A3	Revenue vs CFFO	✅ Pass	Revenue -1.9%, CFFO -7.9% — cash tracking revenue

Expense Quality

#	Check	Result	Detail
B1	Inventory vs COGS	✅ Pass	Inventory +3.8% vs COGS +2.3% — normal
B2	CapEx vs Revenue	✅ Pass	CapEx +2.6% vs revenue -1.9% — proportional
B3	SG&A Ratio	✅ Pass	SG&A/Gross Profit 13.1% — excellent
B4	Gross Margin	✅ Pass	Gross margin 34.9%, -2.7pp — stable for E&P

Cash Flow Quality

#	Check	Result	Detail
C1	CFFO vs Net Income	✅ Pass	CFFO/NI 4.53x — extreme cash conversion (DD&A driven)
C2	Free Cash Flow	✅ Pass	FCF $4.1B, FCF/NI 1.76x
C3	Accruals Ratio	✅ Pass	Accruals ratio -9.7% — deeply negative, very clean
C4	Cash vs Debt	❌ Fail	Cash $2.0B covers 8% of $23.4B debt

Balance Sheet Quality

#	Check	Result	Detail
D1	Goodwill + Intangibles	✅ Pass	No goodwill — clean balance sheet
D2	Leverage	✅ Pass	Debt/EBITDA 2.0x, interest coverage 3.4x
D3	Soft Asset Growth	✅ Pass	Other assets +17.2% vs revenue -1.9% — normal
D4	Asset Impairment	✅ Pass	Write-offs normal

Acquisition Risk

#	Check	Result	Detail
E1	Serial Acquirer FCF	✅ Pass	FCF after acquisitions positive
E2	Goodwill Surge	✅ Pass	No goodwill

Manipulation Score

#	Check	Result	Detail
F1	Beneish M-Score	✅ Pass	M-Score -2.90 — unlikely manipulator

Altman Z-Score: 1.93 (grey zone) | F-Score: 0.44 (low manipulation probability 0.16%)

Key Risks from the 10-K

1.Gulf of America impairment: The filing discloses "a pre-tax impairment of $334 million related to certain wells in the Gulf of America whose future net cash inflows did not indicate that the asset value is recoverable." This suggests high-cost deepwater assets that are uneconomic at current prices.

2.Berkshire preferred stock: OXY carries approximately $8.5B in preferred equity held by Berkshire Hathaway with cumulative annual dividends exceeding $800M. Per the filing, preferred holders can trigger redemption at "above $4.00 per share, on a trailing 12-month basis" — these are effectively senior debt-like obligations that reduce equity available to common shareholders.

3.Environmental litigation: "In September 2025, the New Mexico Environment Department proposed a penalty amount to resolve alleged delays" in environmental compliance. The company elected to use "a $1 million threshold for disclosing certain proceedings arising under federal, state or local environmental laws."

4.STRATOS carbon capture: The midstream segment invested "$0.7 billion before contributions from noncontrolling interest, primarily related to STRATOS" — OXY's direct air capture facility. This is a long-duration bet with uncertain economics.

5.Post-OxyChem concentration: After divesting OxyChem, OXY becomes a pure-play E&P/midstream company, increasing its sensitivity to oil price cycles without the chemical segment's countercyclical offset.

Summary

OXY's F grade is mechanically triggered by the C4 critical check — cash covering only 8% of debt. However, this is one of those cases where the grade overstates the actual risk: the company repaid $9.4B of debt between year-end and the filing date, the M-Score is clean at -2.90, cash flow quality is exceptional (accruals ratio -9.7%, CFFO/NI 4.53x), and zero goodwill means no impairment landmines beyond the disclosed Gulf of America wells. The Z-Score of 1.93 sits in the grey zone but will likely move to safe territory once post-year-end debt repayments are reflected. The real risk for investors is not accounting fraud but commodity price exposure in a post-OxyChem, more concentrated E&P business.