Key Points

• Occidental Petroleum is targeting a $550 million reduction in capital spending this year.

• The company is firming its balance sheet.

• With those positives in mind, Occidental may be punished if it races to lift output.

• 10 stocks we like better than Occidental Petroleum ›

Everyone deals with some form of temptation. Even companies with energy and mining outfits are prime examples, so with oil prices high today, mostly due to the war in Iran, it's a good time to discuss corporate temptation as it relates to energy stocks, including Occidental Petroleum (NYSE: OXY).

When it reported first-quarter results in May, Occidental told investors it expects capital spending to decline by $550 million this year compared with 2025, targeting total spending of $5.5 billion to $5.9 billion. But with oil prices alluringly high, it may appear that Occidental and other oil companies may be incentivized to boost output.

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Consider high oil prices as a form of temptation. Producers see those elevated prices and the knee-jerk response may be a rush to capitalize, but that's not always the smart play. Sometimes, erring on the side of caution is the better course of action. Let's get into why Occidental should not rush to accelerate production simply because crude prices are high.

Avoiding oil's Garden of Eden

With oil prices up over 30% so far this year at this writing, it may be tempting for producers to rush to increase output, but the smart companies know that as quickly as the oil market gives, it can take away. For example, oil prices dipped dramatically in the last month before spiking again.

The point is that Occidental and its peers may decide to boost output today, but by the time they bring a significant new product to market, prices could be significantly lower than what they were banking on. That's one of the risks investors must account for when investing in oil stocks.

Speaking of volatility, that's an apt way of describing the current state of affairs between the U.S. and Iran. The aforementioned tumble in crude prices came in large part due to the two sides hammering out details of a peace accord, but last week, President Donald Trump said the deal is "over," and prices moved up again.

Looked at differently, there's no denying the war in Iran is affecting oil prices. However, there's also no getting around the fact that geopolitical situations can turn on a dime, potentially punishing any oil company that rushes to lift production.

No need to burn goodwill

Shares of Occidental are up 30% year to date, and that gain isn't just about Iran. There are company-specific factors at play. For example, the $9.5 billion sale of the OxyChem business to Berkshire Hathaway wrapped up in January, paving the way for the company to prepay $6.7 billion in debt and eliminate $550 million in annual interest expenses. That implies some investors are giving Occidental credit for its balance sheet-firming efforts.

It'd be prudent for the company not to burn that goodwill, as the stock remains undervalued relative to peers, perhaps signaling that the broader investment community is overlooking the improving balance sheet health and strong asset quality. Getting investors to see those lights could be challenging if Occidental suddenly increases production.

It doesn't need to. If Evercore ISI is right, Occidental is on a path to grow free cash flow by 8% annually through 2030, with WTI prices at $75 per barrel, and possibly restart share repurchases in two years. Best of all, those outlooks aren't based on output moving materially higher in the near term.

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Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway and Evercore. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.