Following the the $55 billion cash-and-stock acquisition of Anadarko Petroleum last August, Occidental Petroleum (OXY) is now the largest producer in the Permian Basin, notes Todd Shaver, growth stock specialist and editor of BullMarket Report.

It is also the #1 producer in the DJ Basin in Colorado and Uinta Basin in Utah. Size counts in the Energy industry since this increases scale and allows for greater economies of scale.

Over the last few years, Occidental worked on improving its assets and has invested in technology to become more efficient. The company lowered its break-even price for WTI to $40.

The Anadarko deal is an aggressive move to expand production. And it comes with good assets that generate significant free cash flow. The acquisition also boosts Occidental’s gathering, processing, and transportation assets.

We have confidence that management will successfully cut out $3.5 billion in costs by 2021 due to the merger. Generally, promised expense reductions are the easiest for companies to meet post-merger.

While the move added $40 billion in debt, ending the third quarter with $48 billion (65% debt-to-total capital), we expect management will begin to pay it down aggressively.

We understand investors’ displeasure with Occidental for taking on additional debt, but the combination was too good to pass up. As management continues to execute, we believe Wall Street will come around. The stock has a lot of upside at the current level.

While waiting for the company to execute cost-cutting and debt reduction, investors receive a nice $3.16 annual dividend, which is a 6.7% yield.

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