Occidental Petroleum (NYSE:OXY) is one of the most profitable oil companies with an asset base that has been growing for years. Higher oil prices and aggressive debt reduction are two of the main reasons behind the company’s success this year. It posted stellar second-quarter results, with oil profits expected to rise amidst a likely fuel shortage in the winter. Moreover, the oil giant benefits from the Warrant Buffet effect, who is now a major shareholder. Hence, we are bullish on OXY stock.
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Warren Buffett’s Berkshire Hathaway is on a buying spree, loading up on shares of OXY. Its investments in OXY are worth roughly $12 billion. The company has 188 million shares, roughly 20% of its outstanding stock. Moreover, it has warrants to purchase another $5 billion in shares. Also, “The Oracle of Omaha” has received regulatory approval to buy up to 50% of OXY shares.
The thought of Buffett buying OXY outright has tongues wagging, and it’s not surprising. His similar investment in railway giant BNSF suggests that a deal will likely go through. The potential of a buyout puts a floor under OXY stock if oil prices continue to drop. Moreover, there is potential for a hefty upside if Buffet makes a bid in the future. Therefore, the risk/reward for investing in OXY stock is highly attractive at this time.
Rising Demand for Oil in Europe is a Major Catalyst
Fuel prices spiked this summer in Europe due to an unprecedented heat wave that hit the continent. Moreover, fuel prices will likely worsen over the winter when Europe’s LNG consumption rises at an aggressive pace. The U.S. might also struggle with high fuel costs and an impending shortage of natural gas.
With Russia no longer an option, the European Union (EU) is likely to opt for the U.S., which is the best bargaining partner at this time. The prospect of skyrocketing gas prices has caused panic in the U.S., with many politicians calling for export limits to keep costs down again this year. Therefore, sourcing cheap natural gas for the EU will be a herculean task.
In contrast to oil, gas prices are less flexible because unsold LNG cannot be rerouted. Hence, the gap in LNG supply is keeping prices higher than they should be, which means Europe may have to import a lot more oil this winter. Therefore, OXY and its peers are likely to benefit immensely from this probable development.
How OXY Separates Itself from the Pack
OXY has been one of America’s most successful upstream oil companies. Moreover, its business is complemented by incredibly robust midstream and chemical segments. OXY set out to grow its cash flow in 2022 before oil prices shot up this year. It prioritized paying down debt and nurturing a sustainable dividend, which it achieved with record free cash flows last year. Moreover, its robust cash generation helped reduce its debt by over $6.7 billion in 2021.
OXY’s CEO announced that shareholders could expect “gradual and meaningful” future dividends. Hence, it’s likely to return a sizeable amount of cash to its shareholders in 2023 at a significantly higher dividend yield.
Is OXY a Good Stock to Buy?
Turning to Wall Street, OXY stock maintains a Moderate Buy consensus rating. Out of 15 total analyst ratings, seven Buys, seven Holds, and one Sell were assigned over the past three months. The average OXY price target is $76, implying 8.8% upside potential. Analyst price targets range from a low of $59 per share to a high of $92 per share.
Bottomline: OXY Stock Will Continue to Attract Investors
Though oil stocks are typically susceptible to falling prices, it’s hard not to like OXY when you consider the Buffett effect. Also, OXY is betting on carbon capture and storage, a market that could be worth billions in the years ahead. It has turned out to be a great long-term investment for anyone looking to invest in energy stocks. The company has been making smart decisions and rewarding its shareholders with growing dividends, which will keep attracting more money from investors.
The global economy is set for a major shake-up as renewable energy resources become more widespread and affordable than fossil fuel products. However, there is likely to be a massive fuel shortage this winter amidst sanctions against Russian LNG exports. Therefore, natural gas prices could potentially rise much faster than oil prices.
The Fed is sending strong signals that they plan to continue quantitative tightening for an extended period, which could have investors fretting over investments in the stock market. However, it’s safe to say that OXY has the best momentum of all its competitors, which makes it a top investment prospect in its sector.
