Just about two and a half months ago, I wrote regarding the reasons behind the enthusiasm of Warren Buffet with Occidental Petroleum (OXY) after Berkshire Hathaway ($BRK.B) increased its holdings in the company. Well, he did it again. The young rascal has broken his own rules and added shares to a (supposedly) losing stock. Experts scratching their heads and wondering what he is doing. Yes, OXY’s fundamentals look strong and promising, but the energy industry is volatile, they say. Moreover, the rising temperature of geopolitical tensions looks like they’re about to explode, directly impacting the industry. So, what is the oracle of Omaha thinking?
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In the meantime, the signals coming from Wall Street are somewhat conflicting, with a Hold rating being the analyst consensus. However, On Tipranks’ Smart Score, OXY shares have a score of 8, meaning an outperform rating and a positive outlook for the near term.
Despite the stock’s recent underperformance, down over 17% year-to-date, and the energy industry’s volatility in general (despite the stock’s beta of 0.43), Buffett’s continued buying spree underscores his strong conviction in Occidental’s long-term potential. This raises the question: What does Warren Buffett see in Occidental Petroleum that the broader market might be blind to?
If you wish to read more about Occidental, you can read what our analyst at Tipranks, Mike Byrne, had to say about the stock’s prospects.
Now, let’s examine three key points where we’ll try to guess Buffett’s reasoning for increasing his investment in the energy sector:
- Operational Efficiency and Debt Reduction: Buffett values companies with strong operational efficiency and shrewd financial management. Occidental has been focusing on improving its operational margins and significantly reducing its debt. The company reported strong third-quarter results, achieving record U.S. production and generating $1.5 billion in free cash flow. Additionally, OXY’s focus on acquisitions to diversify its portfolio and enhance its cash flow, such as the recent CrownRock (CCK) acquisition, has proved successful. These efforts indicate a solid foundation for future growth and financial stability. As five-star analyst Matt DiLallo from The Motley Fool noted, “Occidental Petroleum’s acquisition of CrownRock paid off during the third quarter. The oil company has made significant progress in repaying debt, and debt reduction remains a near-term priority.”
- Strategic Acquisitions and Growth Potential: Occidental’s strategic acquisitions are expected to enhance its profitability and operational capabilities. These acquisitions showcase the company’s commitment to growth and expansion, which bodes well with Buffett’s investment philosophy of seeking companies with strong long-term growth prospects. Additionally, Occidental’s carbon capture and storage (CCS) technology investments highlight its forward-thinking philosophy of sustainability and progress.
- Undervaluation and Market Mispricing: Despite recent declines in its stock price, Occidental’s valuation suggests that the company may be undervalued. With a P/E ratio of 12, the stock trades at a significant discount compared to the broader market. Dilallo thinks that’s why Buffet skewed its investment strategy of never reinforcing a losing position – “Buffett and his team have a high conviction in Occidental Petroleum’s ability to grow shareholder value in the future.”
Is Occidental Petroleum a Buy or Sell?
On Wall Street, Occidental is a Hold. The average price target for OXY stock is $60.75, implying a 25.10% upside potential.
A Method Behind the Madness
In what seems like a deviation from its investment philosophy, Warren Buffet and Berkshire Hathaway have increased their stake in OXY shares after suffering losses through 2024, strengthening what seems to be a losing stock. However, Buffet clearly sees an upside potential for OXY stocks backed by a shrewd business strategy and strict debt reduction, which positions the company for a much better 2025.
