Why Is Buffett Buying So Much Occidental Petroleum?

Renewable energy might have been considered an inevitability a few years ago, but the transition has stagnated. Demand for electric vehicles has stalled, costing EV companies like Tesla billions of dollars at time.

Geopolitical tensions, persistent inflation, and high interest rates, have all played a part in slowing the shift from fossil fuels.

Those factors might fuel investing icon Warren Buffett’s interest in oil and gas producer Occidental Petroleum (NYSE: OXY). Shortly after lamenting that there were no quality opportunities in the market, the “Oracle of Omaha” proceeded to buy Occidental stock for nine straight days in June.

Buffett’s firm, Berkshire Hathaway, now owns a 29% stake in Occidental, making OXY the storied company’s sixth-largest holding.

Buffett has continued to build his position since he first bought Occidental in 2019. Berkshire now owns 255 million shares of OXY, warrants to buy another 83.9 million, and $10 billion in preferred shares.

If Buffett exercises his warrants, Berkshire could own 40% of Occidental Petroleum, and the firm has already sought and received approval to take up to a 50% stake. However, OXY only has a 4.7% year-to-date return, supplemented by a 1.4% annual dividend yield.

So why is Buffett accumulating such a high stake in Occidental Petroleum?

Why Did Occidental Petroleum Stock Go Up?

After the early May release of Occidental’s first quarter of 2024 earnings, OXY slumped. It has recovered, likely due to the news of Buffett’s persistent purchasing. Over the past month, Occidental stock has gained around 1%.

Part of the reason OXY dropped is sales are slumping. Q1 revenue of $5.98 billion was 17.3% lower than last year, and 11.4% lower than analysts expected.The company attributed the drop in revenue to lower crude oil prices.

The majority of the Houston-based company’s revenue comes from drilling and producing oil, so oil prices have a marked impact on the company’s sales.

During the first quarter, Occidental delivered 1.17 million barrels of oil equivalent each day, coming in slightly below its average guidance. Oil production was hampered by a pipeline outage in the Gulf of Mexico.

The company’s net income plummeted almost 30% year-over-year to $888 million, meaning diluted earnings per share was $0.75 for the quarter. Despite the drop, Q1 EPS surpassed analysts’ expectations by over 11%.

It was a tough Q1, but Buffett has insisted that Occidental is a stock he plans to hold long-term. In his annual letter to Berkshire shareholders, Buffett said Occidental Petroleum CEO, Vicki Hollub, was doing exactly what he would do in her situation.

“Under Vicki Hollub’s leadership, Occidental is doing the right things for both its country and its owners,” Buffett wrote. “We particularly like its vast oil and gas holdings in the United States, as well as its leadership in carbon-capture initiatives.”

Will Occidental Petroleum Stock Keep Going Up?

The company’s carbon capture operations, which strip carbon dioxide from the atmosphere, bury it, and use the material to make products like concrete and aviation fuel, has been a growing segment for Occidental.

Financial giant BlackRock invested $550 million in Occidental’s new carbon capture plant in West Texas.

Hollub has also been aggressive in creating growth through acquisitions. The company’s $55 million purchase of Anadarko Petroleum in 2019 gave Occidental a strong position in the oil-rich Permian Basin. Occidental was able to make the purchase due to Buffett’s $10 billion investment.

The company made another move to strengthen its position with the $12 billion purchase of CrownRock. The deal is expected to increase free cash flow by $1 billion in the first year, given oil prices stay at $70 a barrel.

The purchase was originally expected to close in the first quarter of 2024, but it has been pushed back to Q3. That disappointed investors who were hoping for a more immediate impact from the transaction. It’s worthwhile to note that Occidental has not included any revenue from the CrownRock acquisition in its guidance for the year.

Analysts Ratings On Occidental Petroleum Stock

Slumping sales and the delayed acquisition have made Wall Street analysts more bearish than Buffett on OXY. Out of 26 analysts who have rated the stock, 17 believe it’s a hold.

There are still nine buy ratings on OXY, and two analysts believe Occidental shares will outperform the market over the next year. The highest forecast is $90, which represents a 42.8% increase from where the stock currently trades.

The consensus forecast is $72.62, which translates to a 15.2% jump over the next 12 months. There is one Sell rating on OXY, and the lowest forecast is $63, a 0.05% drop from where the stock currently trades.

Is Occidental Petroleum Stock Undervalued?

Analysts largely believe the stock has room to rise from here. Buffett would likely agree, since he’s been buying OXY whenever the price dips below $60, and the stock is not far off now.

Occidental currently has a price-to-earnings multiple of 17.14, slightly higher than competitors ExxonMobil and Chevron, which have P/E multiples near 14x.

Occidental Petroleum has a 1.4% annual dividend yield, amounting to a $0.22 per share quarterly payout. Chevron has a 4.17% annual dividend yield while ExxonMobil’s is 3.3%.

Why Is Buffett Buying So Much Occidental Petroleum?

Buffett is most likely buying so much Occidental Petroleum stock because the company has a wide geopolitical moat that will lead to stable oil supply from the Permabasin.

Occidental has forecasted oil prices to stay between $80 to $85 into 2025. If the company can speed its CrownRock acquisition, it has the potential to substantially impact on the company’s bottom line by the end of the year.

With that said, Chevron is a Buffett favorite, and he holds more CVX than OXY. Chevron makes up 5.85% of Berkshire’s portfolio while OXY only accounts for 4.62%. Still, Buffett’s heavy concentration in oil and gas stocks might be construed as a vote of confidence for the whole industry.

Warren Buffett’s interest in Occidental Petroleum, has intrigued investors, and his reasoning is sound. Buffett is betting that fossil fuels will continue to play a strong role in energy solutions for some time, and there are signs he might be right again.

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