Lately, there aren’t many stocks that Warren Buffett finds interesting enough to add to Berkshire Hathaway‘S (NYSE: BRK.A) (NYSE: BRK.B) $385 billion portfolio. Buffett has made only a handful of purchases through Berkshire during the current bull market.
To be fair, Buffett has sold more shares than he has bought in each of the last six quarters. Some of its biggest sales last quarter include some of its top position, Appleas well as all of Berkshire’s positions therein Big global shares and the rest of Berkshire’s interest in PK. But he has consistently added to a number of positions in 2024, including one of his largest positions.
So far in June, Buffett has spent another $435 million Western petroleum (NYSE:OXY) to make it Berkshire’s sixth largest position.
More recent Securities and Exchange Commission filings reveal purchases of Occidental Petroleum between June 5 and June 17. Buffett has been snapping up shares of Occidental as it trades around $60 per share, and investors may want to follow his lead.
A stock that Buffett wants to keep forever
Buffett originally invested in Occidental in 2019, when he purchased $10 billion worth of preferred stock directly from the company for Berkshire Hathaway. That $10 billion investment helped finance Occidental’s acquisition of Anadarko, strengthening its position in the Permian Basin.
While this acquisition left Occidental loaded with debt just before a difficult period for the energy market that no one could have predicted (the COVID-19 pandemic), management navigated the challenging environment admirably. It has suspended its dividend and strategically sold assets to deleverage its balance sheet, and it is once again on solid footing.
Buffett has since expanded his position in Occidental. With the latest $435 million purchase, Berkshire Hathaway now owns about 28.8% of the outstanding shares — a stake worth about $15.9 billion. It also still owns about $8.5 billion in preferred stock, including warrants to buy more of the company’s common stock for $59.62 per share (it currently trades for about $62.90).
In his most recent letter to Berkshire shareholders, Buffett praised Occidental CEO Vicki Hollub and said the energy stock is a holding he plans to keep indefinitely. “Under Vicki Hollub’s leadership, Occidental is doing the right things for both his country and his And its owners,” Buffett wrote. “We particularly like the United States’ vast oil and gas reserves, as well as its leadership on carbon capture initiatives.”
Occidental will strengthen its leading position in the Permian Basin this year with the $12 billion acquisition of CrownRock, which will close in the third quarter. Hollub will likely follow the same scenario as the much larger Anadarko acquisition, selling off non-essential assets to reduce the debt burden on Occidental’s balance sheet. It is already exploring a sale of Permian assets worth more than $1 billion, according to a Reuters report in May.
A big bet on the oil price
Although Occidental is an integrated energy company, most of its revenues and earnings come from drilling. It is in the business of acquiring land and separating oil from rock. That means its profits are heavily dependent on the price of oil.
When it announced its acquisition of CrownRock late last year, the company estimated it could generate an additional $1 billion in free cash flow annually, assuming oil prices remain above $70 a barrel.
Hollub now expects oil prices to remain between $80 and $85 through 2025. Oil prices took a hit after OPEC+ members agreed earlier this month to a plan that would extend their output cuts until 2025 but also allow eight member states to start easing their voluntary cuts from October. However, crude oil prices quickly recovered to around $80.
Buffett took the opportunity to buy Occidental when oil prices were falling, and he has already benefited from the modest recovery. Even if oil prices remain relatively stable, Occidental is well positioned to generate significant cash flow for its shareholders.
Should investors follow Buffett’s example?
As mentioned, almost every time it drops below $60, Buffett buys Occidental stock. At that price, the stock trades at about 14 times forward earnings. That puts it firmly in value stock territory, but it’s not as attractive a valuation as some other oil producers and integrated energy companies.
But Occidental is much more aggressive in growing profits through acquisitions and cost cuts under Hollub. That could lead to much better earnings growth in the long run, especially if oil prices continue to rise. Its strategy carries significant risks, but also brings much more potential growth in the long term. In the meantime, the company is certainly stable enough and generating enough cash to continue growing its business while paying a nice dividend.
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Adam Levy has positions at Apple. The Motley Fool holds positions in and recommends Apple, Berkshire Hathaway, and HP. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Warren Buffett Just Bought $435 Million of These Stocks and Plans to Hold Them Forever, originally published by The Motley Fool
