Warren Buffett has always been a contrarian investor. His company, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B)routinely buys shares of companies in unloved industries or remote locations.
Take Berkshire’s growing investments, for example oil supplies. Berkshire has built significant positions in oil giants Chevron (NYSE: CVX) And Western petroleum (NYSE:OXY). Given their emerging catalysts, these top Buffett stocks look like great buys in June.
Strong growth with a big upside catalyst
Berkshire Hathaway owns nearly 123 million shares of Chevron worth more than $19 billion. This makes the oil giant the fifth largest holding with 6.6% of its investment portfolio.
On the one hand, Chevron stock has been disappointing over the past year. It has underperformed S&P500 and other energy stocks, including ExxonMobil. A major driver is investor concern about the mega deal to be acquired Hess. That’s after Exxon claimed it has the right of first refusal on Hess’ 30% stake in their joint venture to develop the oil-rich Stabroek Block off the coast of Guyana. Chevron does not believe ExxonMobil’s claim has any merit.
Hess shareholders recently approved the $53 billion all-stock deal. However, Chevron cannot complete the transaction until the arbitration case with ExxonMobil is resolved, which may not happen until next year.
The acquisition of Hess would strengthen Chevron’s already robust growth profile. The oil giant can grow its free cash flow by more than 10% annually through 2027, assuming oil prices average around $60 per barrel (crude oil currently costs around $80). Buying Hess would allow Chevron to double its free cash flow by 2027, assuming oil prices are around $70 a barrel. The deal would Also its prospects for production and free cash flow growth into the 2030s.
Defeating ExxonMobil at the arbitration hearing would boost Chevron’s stock. But even if it lost (and had to give up the deal for Hess), Chevron would be just now fine. The company expects to generate a growing stream of free cash flow. It plans to return a significant portion of that money to shareholders through a meaningful share buyback program (it could buy back 3% to 6% of its shares). outstanding shares each year at oil prices of $60 to $70) and continues to increase its high-yield dividend (over 4% yield), which it has increased at a similar pace over the past five years.
Multiple growth catalysts
Berkshire Hathaway owns more than 248 million shares of Occidental Petroleum (28% of outstanding shares) worth more than $15 billion. That puts it just behind Chevron as the sixth-largest holding company with 4.1% of its investment portfolio.
Occidental is also working on a deal to improve growth. Last year it agreed to buy CrownRock for $12 billion in cash and stock. The company expects the acquisition to increase annual free cash flow by $1 billion (assuming oil prices average about $70 per barrel). This deal helped support the company’s decision to increase its dividend by 22% earlier this year.
In addition to increasing free cash flow, CrownRock will also strengthen Occidental’s portfolio. It will add about 170,000 barrels of oil equivalent per day of high-margin production and 1,700 low-cost future drilling sites. That will free Occidental to sell $4.5 billion to $6 billion of non-core assets.
In addition to CrownRock, Occidental Petroleum has a number of other growth engines. The company expects so increase free cash flow from non-oil sources by $1 billion by 2026. Catalysts include higher cash distributions from its investment in Western Midstream, contract expirations at its midstream operations, declining interest costs as it repays debt, and investments to grow its chemicals business (OxyChem). Meanwhile Western continues to invest in organically increasing oil and gas production by drilling new wells, which should grow oil-driven cash flows if crude oil prices cooperate.
Occidental’s growing free cash flow will give it the money to pay down debt, increase its dividend, and buy back stock (including preferred stock owned by Berkshire). Debt repayment and preferred stock repurchases will transfer more value to common shareholders. Add to that growing cash returns for common shareholders, and Occidental could have the fuel to generate strong returns in the coming years.
Buffett’s opposite bet on oil stocks could pay big dividends
Warren Buffett invested a lot of money in Chevron and Occidental. They have strong businesses that generate a lot of free cash flow. Meanwhile, they have strong upside catalysts. Those drivers could give these oil supplies the fuel to produce strong overall returns in the future, making them great Buffett stocks to buy this month.
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Matt DiLallo has positions in Berkshire Hathaway and Chevron. The Motley Fool has and recommends positions in Berkshire Hathaway and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
2 Warren Buffett Stocks to Buy in June Hand Over Fist was originally published by The Motley Fool
