Occidental Petroleum (OXY) has faced a turbulent couple of years, with its stock lagging behind broader market indices. However, Warren Buffett’s Berkshire Hathaway ($BRK.B) continues to pour money into the company and now holds over 27% of its outstanding shares. Even as OXY stock lags, Berkshire’s persistent buying signals Buffett’s long-term confidence in the company. Personally, due to OXY’s robust production capacity, earnings growth potential, and position in today’s energy landscape, I find the stock undervalued and an attractive pick in the sector. I am bullish on OXY stock.
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Berkshire’s Accumulation of OXY Shares
Berkshire Hathaway’s persistent accumulation of Occidental shares has been a beacon of hope in the company’s recent history and a key reason many investors, including myself, are bullish on the stock. For context, Berkshire’s first major involvement began in 2019, when the conglomerate provided $10 billion in financing for Occidental’s acquisition of Anadarko Petroleum for preferred shares and warrants to buy up to 83.9 million shares.
However, Buffett’s more aggressive move on OXY shares began in early 2022. Over just two days in February and March of that year, Berkshire purchased 30 million shares, establishing a significant position. Over the next 11 trading days, Buffett bought an additional 106 million shares, bringing Berkshire’s stake to 136 million shares, representing about 14% of Occidental at that time. Throughout 2022 and 2023, despite OXY’s stock volatility, Buffett continued to add to Berkshire’s position during price dips. Notably, in December 2023, he purchased an additional 10.5 million shares as the stock price hovered around $57.
Since then, OXY stock has faced challenges in gaining upward momentum, but Buffett’s accumulation has continued. By mid-2024, the Omaha-based conglomerate had owned about 27.25% of OXY’s outstanding shares. In fact, according to Berkshire’s latest 13F filing, the company’s consistent buying lasted through the most recent second-quarter period, as it increased its stake by 3.5% to nearly 255.3 million shares.
Why Has Occidental’s Stock Been Declining?
Why has Occidental’s share price been struggling during this period? I believe it’s mainly due to several industry challenges. Volatility in oil prices, driven by macroeconomic uncertainty and geopolitical tensions, has been a critical factor. Although oil prices spiked above $100/barrel in 2022 due to the onset of the Russia-Ukraine conflict, for much of the past year crude oil futures have held within a low-$70’s to low-$80’s trading range. In Q2, Occidental’s average realized crude oil price was $79.89 per barrel, a slight increase from the previous quarter. However, broader concerns about subdued oil prices over the medium term continue to keep investors on alert.
Furthermore, investor sentiment in Occidental has been negatively affected by the steep decline in natural gas prices. Domestic realized gas prices declined by 66% in Q2 2024, for instance, weighing heavily on the company’s profitability. Additionally, Occidental has faced growing operational costs and inflation, while its significant investments in carbon capture technologies through its Oxy Low Carbon Ventures unit have not yet generated the recognition or returns that were expected.
Occidental’s Outlook Remains Bright
Despite these headwinds, I believe Occidental’s future remains promising. Wall Street analysts anticipate strong earnings growth for the company in Fiscal 2025. The company is estimated to reach earnings per share (EPS) of $3.56 this year, down 3.8% from Fiscal 2023. However, EPS is forecasted to jump to $4.65 in the year after, implying a year-over-year growth of over 30%.
This outlook seems to be supported in numerous ways. Most importantly, I believe it is backed by Occidental’s robust production levels and a potential recovery in oil prices. The company has consistently surpassed its production guidance, with Q2 production reaching 1,258 thousand barrels of oil equivalent per day (Mboed). Additionally, Occidental’s acquisition of CrownRock, expected to close in late 2024, will improve Occidental’s position in the Permian Basin, adding high-margin, low-breakeven production.
Valuation speaking, Occidental is trading at ~11.7x its projected Fiscal 2025 EPS, a multiple I view as relatively attractive. I believe it presents a good entry point for investors looking to hold the stock for the long-term, especially given the current geopolitical environment. The ongoing war in Ukraine and rising tensions in the Middle East have raised the importance of energy security, positioning Occidental as a strategic player due to its strong U.S.-based production assets.
Is OXY Stock a Buy, According to Analysts?
Peeking at Wall Street’s view of the stock, TipRanks slots Occidental Petroleum as a Moderate Buy based on six Buy ratings, 12 Hold ratings, and one Sell rating assigned in the past three months. At $67.56, the average OXY stock price target implies nearly 25% potential upside.
If you’re unsure which analyst to follow on Occidental Petroleum stock, consider John Freeman from Jefferies. Over the past year, Freeman has been the most profitable analyst on this name, delivering an average return of 26.36% per rating with a 63% success rate.
Concluding Thoughts On OXY Stock
In conclusion, despite Occidental’s prolonged share price lag, I believe that its robust production capacity, attractive valuation, and acquisition of CrownRock assets position the company for future success. These are catalysts that Warren Buffett likely observes as well, given Berkshire’s continued participation in Occidental. For certain, near-term challenges like oil price volatility and rising operational costs may persist. Regardless, the projected earnings growth for Fiscal 2025, along with Occidental’s strategic significance in the domestic energy sector, make it an attractive investment particularly for those with a long-term perspective.
