Warren Buffett has been steadily increasing his position in Occidental Petroleum, making it the sixth-largest holding in his impressive portfolio. Buffett appreciates Occidental’s efficient capital management and potential benefits from rising oil prices. Occidental’s recent acquisition of CrownRock for roughly $12 billion is expected to boost its cash flow but has also increased its debt and exposure to high-decline shale assets.
If oil prices rise to $75 per barrel, Occidental believes its free cash flow per share would jump to $5.27—a 25% increase. Despite recent volatility, Occidental remains a well-run business in Warren Buffett’s eyes. Following the stock price decline, Occidental shares are trading at 11.5 times expected free cash flow at $70 WTI oil prices, a fair price for long-term oil bulls.
When oil prices reverse course, Occidental should be well-positioned to capitalize. However, ensure you’re a long-term oil bull, as the shares have little chance of outperforming the market if crude oil prices weaken further.
Buffett’s Occidental investment potential
Buffett expressed his affection for Occidental’s vast oil and gas holdings in the United States, emphasizing the shift from reliance on foreign oil to domestic production. Additionally, he praised Occidental’s CEO, Vicki Hollub, noting that his preference for “forever” holding periods applies to “outstanding businesses with outstanding management.”
There are two main reasons Buffett might purchase more Occidental shares before 2024 ends. Firstly, he has been a net seller primarily because he hasn’t found many stocks with attractive valuations.
Occidental is currently cheaper than it was earlier this year, and Berkshire Hathaway owns warrants that allow it to purchase shares at a fixed price, reducing valuation risk. Secondly, the business environment for oil companies like Occidental could improve. The regulatory landscape might become more favorable, potentially enhancing Occidental’s profitability.
While it’s not a certainty that Buffett will be buying Occidental stock aggressively before the end of the year, it’s likely given Occidental’s attractive valuation and Berkshire’s steady acquisition pattern. Berkshire Hathaway’s regulatory filing in mid-February will reveal the stocks bought in Q4, offering more clarity on Buffett’s moves.
