Occidental Petroleum (OXY) was already one of Berkshire Hathaway’s ($BRK.B) biggest equity investments, but that didn’t stop Warren Buffet from buying even more shares of the energy stock this week. The legendary investor keeps his finger on the buy button and ramps his position. Should investors join him?
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I’m bullish on shares of the oil giant based on Buffett’s high conviction, the stock’s potential to catch up with the broader market, and its cheap valuation. Additionally, Wall Street analysts see Occidental as having significant potential upside over the next year.
What Is Occidental Petroleum?
Founded over 100 years ago and based in Houston, Texas, Occidental is one of the world’s largest independent oil exploration and production companies. It has operations in the United States, Latin America, Africa, and the Middle East. Occidental is best known for its extensive operations in the Permian Basin, which has the lowest cost of production in the U.S. As of the end of last year, Occidental had proven reserves of almost four billion barrels of oil equivalent.
Occidental also has chemical and midstream business segments and Oxy Low Carbon Ventures, a carbon capture and storage business.
Buffet Hits the Buy Button
Occidental Petroleum was already Buffett’s Berkshire Hathaway’s sixth-largest position as of the firm’s Q3 13F filing. However, according to new filings, the legendary firm bought another 8.9 million shares of the energy producer at an average price of approximately $46 a share for a total of $405 million on a buying spree that spanned Tuesday, Wednesday, and Thursday last week. The buys took Buffett’s holdings to 264 shares worth roughly $12.5 billion. Berkshire Hathaway now owns a whopping 28% stake in the company, so Buffett clearly views Occidental as a high-conviction investment.
Breaking the Rules
Interestingly, Buffett also violated his long-held rule about averaging down to buy more stock. Buffett famously holds on to his winners and avoids adding to his losing investments, but that’s exactly what he did here: he averaged down with Occidental. Before the latest round of share buying, Berkshire’s average cost of its Occidental shares was about $53 a share, and the new shares were purchased at an average price of just $46 a share. This dollar cost averaging can be viewed as Buffett doubling down on an investment he strongly believes in, enough to break one of his own rules of investing.
No Surprise Buffett Likes Occidental
Buffett is a value investor, so it’s no surprise that he likes Occidental. The stock is quite inexpensive, trading at just 14 times 2024 earnings. This is a significant discount to the broader market as the S&P 500 (SPX) currently trades for 24.5 times earnings.
At a time when the S&P 500 is trading at record levels and has an elevated valuation, it’s not a bad idea to balance out some of the high-flying winners in one’s portfolio with a few defensive stocks with lower valuations like Occidental. These should offer some downside protection as well as the potential for upside if the market comes back around to it.
Room to Rebound
Much has been made of the S&P 500’s 2024 performance, in which the broad market index has gained 26.6% year-to-date with just a couple of trading days left in the year. However, Occidental has not joined this rally and is down 19.4% year-to-date. This 46% gap in performance leaves plenty of room for Occidental to rebound and catch up with the broader market if investors look to take profits from some of 2024’s winners and rotate into some of its laggards in 2025.
Returning Capital to Shareholders
Occidental is also a dividend stock. While its dividend yield of 1.76% is lower than that of some of its oil patch peers, it is higher than that of the S&P 500, which currently yields 1.3%.
Occidental cut its dividend to just a penny a share as oil prices plummeted during the COVID pandemic in 2020, so it’s hard to call this a rock-solid dividend stock. However, since then, the company has done a good job of returning to dividend growth. For example, with the pandemic and its knock-on effects on the oil market, the company quickly raised its quarterly dividend from $0.01 to $0.13. The company subsequently increased this quarterly payout to $0.18 per share for 2023 and $0.22 per share for 2024.
The company also returns capital to shareholders via share repurchases, buying back $1.8 billion worth of shares in 2023 and redeeming $1.8 billion worth of preferred shares.
Is OXY Stock a Buy, According to Analysts?
Turning to Wall Street, OXY earns a Moderate Sell consensus rating based on six Buys, Hold, and one Sell rating assigned in the past three months. The OXY stock price target of $60.75 implies a 26.25% downside potential from current levels.
Invest Like Buffett
I’m bullish on shares of Occidental Petroleum at these levels. Buffet is a fan of the stock and views it as a high-conviction play within his portfolio, doubling down at levels well below his previous average purchase price. In addition to Buffett’s endorsement, I also like Occidental because it is inexpensive and its underwhelming 2024 performance leaves plenty of room to catch up with the broader market going forward.
