Warren Buffet has one of the best investing track records of all time. If you want to find profitable investments, just pay attention to Buffett’s portfolio.
Diving into his holdings, there is one oil stock that stands out. It’s even possible that Buffett will eventually take over the entire company.
For the time being, the shares remain available to the public. If you have $200 that you don’t need for daily necessities, now seems like a good time to make one of Buffett’s biggest bets, thanks to the stock’s recent pullback.
Warren Buffett makes most of his investments through his holding company, Berkshire Hathawaywhich has a portfolio of publicly traded companies valued in the hundreds of billions of dollars. The top 10 holdings in the portfolio are full of recognizable, iconic companies, but the sixth largest holding may surprise you. It’s an oil company that most ordinary citizens have never heard of: Western petroleum (NYSE:OXY).
It’s not hard to figure out what Buffett likes about Occidental. He has commented extensively on the position since he first started buying shares in 2019.
For example, this summer, Buffett told CNBC the first time he read the company’s annual report. “I read every word and said this is exactly what I would do,” he said, adding that the CEO is “running the company the right way.”
Capital management is critical to any business, but especially in the oil industry, where producers must continually search for more resources or acquire additional properties, factoring all associated costs into expected profits. Small mistakes can lead to capital disasters. From his perspective, Buffett thinks Occidental is one of the best when it comes to efficient capital management.
Although he didn’t comment specifically, Buffett may also like Occidental for its exposure to rising oil prices. Most oil investors are optimistic about oil prices as most oil operators struggle with downward price conditions.
However, if you’re confident that oil prices will remain stable or even rise in the long term, Occidental is a great place to be, as it recently agreed to acquire CrownRock for approximately $12 billion. This will mean immediate cash flow for the company, but also additional debt and greater exposure to shale assets that are in deep decline.
West Texas Intermediate (WTI) crude today costs about $70 per barrel. With the acquisition of CrownRock, Occidental expects cash flow per share to be approximately $4.22 per share. If oil prices rise to $75 per barrel, an increase of 7%, Occidental believes free cash flow per share will rise to $5.27 – an increase of 25%. Simply put, Occidental has a lot of upside in a rising price environment.
Companies that extract natural resources and sell them on the global market are exposed to volatility they cannot control. The West is no different. Since April, the company’s share price has fallen nearly 30%.
The main cause was not due to Occidental specifically, but to market prices for oil, which fell by almost 20% during the same period. Just as Occidental has been able to benefit from the upward trend in an environment of rising prices, so has it disadvantage in an environment of falling prices.
Price volatility aside, Occidental is a well-managed company, at least as far as Warren Buffett is concerned. If you agree, consider taking advantage of these fixes.
After the decline, Occidental’s stock trades at 11.5 times expected free cash flow at an oil price of $70 WTI. That’s a fair price for those who are optimistic about the long-term pricing of oil. Just be prepared to double down if oil markets show further weakness, a reality that will undoubtedly put further pressure on Western equities.
The company has sufficient financial capabilities to realize such a scenario, such as suspending the share buyback program and cutting the dividend by 1.8%. When oil prices change course, Occidental should be ready to capitalize. Just make sure you’re a long-term oil bull, as stocks likely have little chance of outperforming the market if crude prices weaken from here.
Before you buy shares in Occidental Petroleum, consider the following:
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
The Ultimate Oil Stock to Buy Now with $200 was originally published by The Motley Fool
