Buffett Boosts Stake, Triggers Options Boom in Occidental Stock

Key Points

• Buffett is buying more Occidental Petroleum stock and is spotting a coming rise in the oil cycle shortly. 
• This announcement led option traders to flock to the stock for a good reason, but analysts see an even bigger one. 
• Markets are bidding up the stock's valuation to show their enthusiasm for its future prices today. 

Options traders are known as either the smartest of the bunch out there or the most willing to take on increased risks. When someone buys an option – particularly a call option – that person is betting on the direction of a particular stock and the timing upon which that stock will reach a specific price. Getting any of these two factors wrong could mean a 100% loss of principal.

It is interesting to see how this options tracker caught Occidental Petroleum Co. NYSE: OXY in a call option breakout. Many traders flocked in, wanting to see the stock at a higher price relatively soon. Of course, this move is warranted by the news that Warren Buffett is upping his stake in the company, which is always a reason for bullish traders to celebrate.

However, monetizing what’s in the rear-view mirror is often challenging, so investors can look elsewhere for opportunities within the energy sector. This time, earnings per share (EPS) growth prospects are of the essence if some are to beat the market this quarter, and that is where Chesapeake Energy Co. NASDAQ: CHK comes into play. First, here’s why Buffett decided to boost his presence in oil.

Buffett's Insight: Spotting the Next Oil Price Supercycle

Recently, OPEC+ announced its commitment to keep cutting oil production rates this year, severely affecting the future trajectory of oil prices per barrel. Earlier this year, analysts at The Goldman Sachs Group Inc. projected oil to range between $70 and $100 per barrel for the rest of 2024.

So far, these analysts have been right on the lower end of their projections, as oil has recently struggled to break above $80. However, as Buffett probably knows, the prospects of the Federal Reserve (the Fed) rate cuts could prove his decision right, as cheaper financing could boost business activity and thus oil demand.

Knowing this, analysts have projected up to 28.5% EPS growth for Occidental Petroleum for the next 12 months, outpacing the lowering rate of economic growth in the U.S. as judged by a lower revised GDP growth rate of only 1.3%.

These same analysts see a valuation of up to $70.9 a share, calling for a 16.7% upside from where the stock trades today. Despite enough upside for these major option traders to make a ‘quick’ buck, here’s where investors can see how the juice is worth the squeeze.

Chesapeake Energy Stock: The Best Growth Play for Potential Oil Price Surge

Outpacing Buffett’s selection comes Chesapeake Energy stock’s EPS projections for up to 435.7% this year. Despite such aggressive projections, some on Wall Street have yet to recognize where this stock’s valuation could end up.

Only those at Stephens saw it fit to slap a valuation of up to $117 a share for Chesapeake Energy stock, calling for a 33.5% upside from where the stock trades today. However, because EPS typically drives stock prices, a 33.5% upside driven from 435.7% EPS growth seems disconnected from its true potential.

Because Chesapeake Energy stock trades up to 95% of its 52-week high, close to its all-time high, investors can partly assume that markets are willing to favor this oil company over Buffett’s choice.

Occidental Petroleum stock trades at only 85% of its 52-week high prices, which still shows a long way to go if the stock wants to reach its all-time high of $117.9 a share set in 2011.

Market Perception Shifts Favorably Toward Chesapeake Over Occidental

Investors can gauge market sentiment toward a stock in two ways, especially when comparing it against a peer or a group. The first is already taken care of, which is EPS growth prospects for the next 12 months; the second is more straightforward.

When markets look to place a value on these future earnings, they use the forward P/E ratio, and whichever stock commands the higher rate is considered to have a more bullish regard from the markets.

It is no wonder that Chesapeake Energy has performed in line with the Energy Sector Select SPDR Fund NYSEARCA: XLE over the past 12 months, outperforming Occidental Petroleum stock by as much as 10%.

In the case of Chesapeake’s 16.8x forward P/E, it commands a premium of 39.2% over Occidental’s 12.1x valuation. There is always a good reason for stocks to trade at premium valuations and be near their 52-week or even all-time highs, and this time for Chesapeake Energy; the reasons lie in a commodity upcycle and industry-leading EPS growth.