Occidental: Look To Buy Alongside Buffett

Summary:

• The energy sector has underperformed in the last 6-8 months, while the overall stock market has surged.
• Occidental Petroleum Corp. has dropped significantly as Warren Buffett stopped supporting the stock below $60.
• My investment thesis is now Neutral on Occidental Petroleum following its dip to $45.
• The stock presents decent value now, but the absence of Buffett’s support is a key consideration.

The energy sector has been crushed over the last 6 to 8 months, while the overall stock market has soared. Occidental Petroleum Corp. (NYSE:OXY) has finally fallen hard, as Warren Buffett pulled back from propping up the stock on purchases every time the stock fell below $60. My investment thesis is now more Neutral on the stock following the dip to $45, though downside risk still exists.

Buffett Put Is Gone

Berkshire Hathaway (BRK.B, BRK.A) originally invested in OXY back at the Covid lows with the oil production company desperate for cash. Ever since, Warren Buffett’s investment firm regularly bought shares in the open market when the stock was trading around $60.

My investment thesis long pushed investors to not buy shares when the stock originally soared to $70 back in 2022. Berkshire Hathaway wasn’t paying up for the stock above $60, and in fact, signs suggested OXY was overvalued due to the very fact investors were following the Buffett put.

As long predicted, once Berkshire Hathaway quit buying shares, the stock would plunge below $60. The investment firm hadn’t bought shares since June 17 when the stock traded right below the key threshold.

Berkshire Hathaway just reported the purchase of another 8.9 million shares for about $405 million. The firm now owns 264 million shares, for nearly 30% of the outstanding shares. Along with the preferred shares, Warren Buffett owns warrants to purchase 83.5 million shares of OXY at $59.62 per share, though the warrants are no longer close to being in the money.

OXY is now down 25% during this period, but other energy plays have fallen much further. Devon Energy (DVN) traded at a similar high of $70+ back in 2022 and the stock has fallen all the way to $30 now versus the $45 for OXY.

Berkshire Hathaway ended the last quarter with a record cash balance of $328 billion. The firm doesn’t lack for cash and would logically spend the money on OXY for a reasonable price, which is apparently now deemed at $45 versus the prior view at $60.

Decent Value Now

The biggest worry all along was the price of oil. After the Russian attack on Ukraine, investors appeared certain oil prices would remain elevated into the future, and the risk was for the opposite to occur.

Oil prices haven’t really collapsed, though WTI currently trades below $70. The U.S. has effectively ramped up oil production to record levels of 13 million/bpd and President-elect Donald Trump has promoted an energy first plan.

The ultimate outcome of even more oil production could be much lower prices. OPEC has even forecast lower oil demand growth for 2025 at 1.4 million bpd leading to a forecasted 950,000 bpd supply surplus in another hit to oil prices.

OXY recently still produced a $1 quarterly EPS for Q3 despite lower energy prices, with the average realized WTI price of $75.09 per barrel. The oil production company actually produced a solid $1.5 billion in free cash flow.

In essence, OXY faces even lower oil prices for Q4 and possibly into 2025. The investor concern all along should’ve been a scenario where the typical energy cycle sends oil prices back down to some typical lows around $40/bbl, regularly hit during the 5-year period prior to the Russian invasion of Ukraine.

At a $3 EPS with lower oil prices, OXY trading at $45 would appear rather expensive. As a prime example, Devon Energy has a higher EPS and the stock trades down at $30.

Takeaway

The key investor takeaway is that Warren Buffett is apparently back to buying OXY shares at $45. Berkshire hasn’t bought consistently at this price to indicate whether this price becomes the new Buffett put level.

Our view is that OXY needs to trade lower more in line with Devon to be attractive, but investors can definitely use the Buffett signal to start buying shares here at a much more attractive price than the previous put up at $60. The risk is definitely that $45 doesn’t end up being the line in the sand.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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