Buffett's Big Bet: Should You Follow Berkshire's Move on OXY?

Key Points

• Warren Buffett's Berkshire Hathaway increased its stake in Occidental Petroleum (OXY) by 7.2 million shares, bringing the total to 255 million shares valued at nearly $16 billion.
• OXY holds a consensus hold rating, but its price target forecasts an over 25% upside.
• Occidental's solid financials include a 1.52% dividend yield, a recent earnings beat, and significant progress in debt reduction, reinforcing Buffett's confidence in the company.

Investors eagerly await Berkshire Hathaway's NYSE: BRK.B 13F filing every quarter, unveiling Warren Buffett's latest stock moves. This event is closely watched as it offers a rare glimpse into the strategies of one of the greatest investors of all time. 

Among the most recent highlights from the second quarter of 2024 is Berkshire's increased stake in Occidental Petroleum NYSE: OXY, which has been a significant part of Buffett's portfolio for the past few years.

Buffett's History with Occidental Petroleum

Buffett's involvement with OXY began nearly four years ago when Berkshire funded Occidental's acquisition of Anadarko with a $10 billion equity investment. About two years ago, as oil prices surged following Russia's invasion of Ukraine, Buffett began purchasing shares in Occidental.

Buffett mentioned that his decision to start buying Occidental shares came after thoroughly reviewing the company's earnings call transcript. "I went through every detail and realized this is exactly how I would run things," he said, praising CEO Vicki Hollub for steering the company in the right direction.

At Berkshire's annual meeting in May last year, Buffett expressed confidence in OXY's management, stating, "We're not going to buy control," emphasizing trust in the company's leadership.

In the latest 13F filing, Berkshire reported buying 7.2 million more shares of Occidental Petroleum, bringing its total stake to around 255 million shares valued at nearly $16 billion, representing 5.7% of Berkshire's total portfolio.

Should You Buy OXY Too?

Analysts remain cautiously optimistic about Occidental. Based on 15 ratings, the stock holds a consensus Hold rating, unchanged over the past year. However, with a consensus price target of $71.94, analysts see over 25% upside potential for OXY.

Since Buffett first started purchasing shares in March 2022, OXY has seen its stock rise nearly 50%, outpacing the S&P 500's 24% gain in the same period. However, in 2024, OXY has underperformed, with shares down 3.89% year-to-date, compared to the S&P 500's nearly 18% gain. 

Despite this, OXY's fundamentals remain compelling. Its 1.52% dividend yield, attractive P/E ratio of 15.78, and consistent buying by Berkshire make it a potential buy for long-term value and income-focused investors.

OXY's Earnings Beat and a Strengthening Balance Sheet

Occidental's recent earnings report on August 7th, 2024, further solidifies its strong performance. The company reported earnings per share of $1.03, beating the consensus estimate by $0.26, and revenue was up 2.2% yearly to $6.88 billion.

Its key profitability metrics compare well to those of its competition, and another one of Buffett's long-term focuses is Chevron NYSE: CVX. Occidental's net margin is 16.6% compared to Chevron's 9.31%. Return on equity is 17.91% for OXY versus Chevron's 13.7%.

On August 19th, Occidental announced significant progress in its debt reduction efforts, achieving $3 billion in principal debt reduction in the third quarter of 2024. This success was fueled by solid cash flow from operations and proceeds from divestitures, including $700 million raised from a public offering of Western Midstream Partners' common units. With an expected total debt reduction of over $3.8 billion by the end of the third quarter, Occidental is on track to meet nearly 85% of its $4.5 billion debt reduction goal, strengthening its balance sheet and enhancing shareholder returns.

Buffett’s Faith in Occidental: What It Means for Investors

Buffett's continued investment in Occidental Petroleum underscores his confidence in the company's long-term potential, foundation, and management team. While analysts maintain a Hold rating, the stock's significant upside potential, solid fundamentals, and competent management make it a compelling option for investors seeking value and income in the energy sector. As always, conducting your own research and considering your investment goals before following in the footsteps of the Oracle of Omaha is crucial.