Why Is Buffett Buying So Much Of This Energy Stock?

Warren Buffett is stocking up on shares of energy giant Occidental Petroleum, potentially considering it as a permanent addition to Berkshire Hathaway’s equity portfolio. What are the factors prompting Buffett to make this move? 

Buffett’s flagship holding company, Berkshire Hathaway Inc. (NYSE:BRK.A; NYSE:BRK.B), is increasingly betting on the success of energy giant Occidental Petroleum Corporation (NYSE:OXY), making it the Oracle of Omaha’s sixth-largest stock holding.

Although Buffett has shown his faith in large conventional U.S. energy company Chevron Corporation (NYSE:CVX) as well, OXY is likely to be a forever holding for Berkshire like The Coca-Cola Company (NYSE:KO) and American Express Company (NYSE:AXP).

How Much Occidental Petroleum Does Buffett Own?

In Q4 2023, Berkshire held 27.8% of OXY’s common shares, equating to approximately 243.72 million shares for a total value of $14.55 billion.

Berkshire started investing in Occidental Petroleum in 2019, showing faith in the company’s acquisition of Anadarko Petroleum Corporation. Berkshire made an investment commitment of $10 billion in the company.

This included Occidental Cumulative Perpetual Preferred Stock, with an aggregate liquidation value of $10 billion and warrants to purchase up to 80 million shares of its common stock at $62.50 per share.

The Sage of Omaha’s eagerness to acquire shares has extended into this year when he bought about 4.30 million shares in February, taking Berkshire’s total investment in Occidental Petroleum to 248.02 million shares with a total value exceeding $15 billion.

Although the warrants give Buffett the chance to increase ownership, Berkshire shows no intention of taking over or managing Occidental Petroleum. Instead, Buffett looks happy with his ownership and the option.

He praised Occidental Petroleum’s CEO Vicki Hollub for doing what’s right for the country and the shareholders and for her “uncommon talent” of knowing “how to separate oil from rock.”

Is Occidental Petroleum as Good as Buffett Believes?

Occidental Petroleum has long been a player in the U.S. oil and gas sector, and historically has been engaged in the acquisition, exploration, and development of oil and gas properties. As the majority of the company’s operations are dependent on oil prices, which are highly sensitive to geopolitical issues, its financials are volatile.

Occidental Petroleum was gearing for gains from its Anadarko acquisition when the world virtually shut down a few years ago. Oil prices nosedived in 2020, with the West Texas Intermediate (WTI), the North American oil benchmark, dropping to negative in April.

As a result, the company slashed its dividend from $0.79 per share to $0.01 per share. However, it has been gradually restoring its dividend and recently increased the quarterly dividend by 22% to $0.22 per share, which translates to a forward yield of 1.43%.

The company has been building up its cash reserves through its production boost. It helped when it realized oil prices of $94.12/barrel of crude oil (BBL) in the U.S. in 2022, as the oil market considerably recovered.

However, in 2023, the company’s performance was lackluster due to fluctuating crude oil prices. Although the company produced 1,223 thousand barrels of oil equivalent per day (MBOE/D), indicating year-over-year growth of 5.5%, its oil and gas net sales stood at $21.28 billion, registering a decline of 21.6% from the prior year.

On the other hand, the company ended 2023 with $1.46 billion in cash and cash equivalents and restricted cash and cash equivalents, increasing 42.7% from the prior year. In addition to recently raising its quarterly dividend by 22%, Occidental paid $600 million of common dividends and invested $6.20 billion back into its business last year.

Therefore, while the events of 2020 demonstrate the unpredictability of its payout, management’s focus on building cash reserves is assuring.

Beyond the stream of income through dividends, Occidental Petroleum’s impressive performance in the last reported quarter may not guarantee a consistent price appreciation, as consensus estimates indicate a year-over-year decline in earnings and revenue in the first quarter of 2024.  

Occidental Petroleum’s Operational Prospects

Given the influence of some unanticipated factors, it’s hard to predict crude prices. Even Warren Buffett said in his last shareholder letter, “No one knows what oil prices will do over the next month, year, or decade.”

While a majority of Occidental Petroleum’s revenues still accrue to the oil and gas sector, it does not operate as a pure-play energy stock. The company has branched out into different sectors to support a wide moat.

Notable among that is its chemical business “OxyChem,” which posted a pre-tax income of $250 million in last year’s fourth quarter, exceeding the company’s guidance.

Moreover, Occidental is eyeing an expansion at its OxyChem Battleground facility, which, alongside other plant enhancements, is expected to add to EBITDA by $300 million to $400 million per year upon completion.

Furthermore, there are two developments that Buffett seems to favor.

First, Occidental’s strides in the Lower Carbon Ventures (LCV) segment, with the carbon capture technology aiming to make its energy operations more sustainable. Aligning with this, it formed a joint venture with BlackRock, Inc. (NYSE:BLK) to develop STRATOS, the world’s largest Direct Air Capture (DAC) facility, expected to capture up to 500,000 tonnes of CO2 per year.

Secondly, Occidental Petroleum’s $12 billion pending acquisition of CrownRock L.P., a Midland-based oil and gas producer, complements the company’s Permian assets and provides the immediate potential to generate cash flow.

This is Occidental Petroleum’s first big-buck acquisition after a drop in oil prices burned the company’s balance sheet after the Anadarko acquisition. On the other hand, this has the potential to stack up short-term debt, given the fact that Occidental Petroleum is assuming CrownRock’s debt as well upon purchase.

However, the incremental cash flow, including an expected $1 billion in the first year and proceeds from a $4.50-$6 billion divestiture program, will also give Occidental Petroleum a chance to reduce its debt principal by about $4.50 billion in a span of 12 months.

Is Occidental Petroleum a Buy Now?

Occidental Petroleum’s dividend and cash reserves still seem to be in the recovery phase. On the other hand, if oil prices remain buoyed, the CrownRock acquisition could chart an impressive path.

Additionally, the stock has performed modestly over the past year. However, impressive fourth-quarter results and Berkshire’s recent accumulation of the stock resulted in the stock witnessing an impressive upside over the past month.

Of the 23 analysts rating the stock, 6 recommend buying the stock, while only one analyst recommends selling it. The remaining 16 analysts have given it a ‘Hold’ rating. The consensus price target of $65.72 per share indicates a potential upside of 7.1%.

While Warren Buffett may have enough reasons to be optimistic about Occidental Petroleum’s prospects, the stock’s valuation looks stretched, trading at 16.63x its non-GAAP trailing-12-month earnings per share. Therefore, it might be best kept an eye on for an opportune entry point, maybe after the CrownRock acquisition is closed.

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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.