XOM - Occidental Petroleum: Rinse And Repeat

2023-05-19 12:36:48 ET

Summary

• Occidental Petroleum Corporation's common stock may be expensive compared to other oil and gas companies. But Berkshire Hathaway Inc. does not have those other choices.
• The oil and gas industry is relatively cheap historically and compared to other market industries. This is still a relatively expensive market.
• The fact that Warren Buffett has purchased the stock in the $50s until the stock heads into the $60s suggests a trading strategy.
• Both oil and natural gas have a bright future ahead.
• Occidental has a chemical division that produces materials like ethylene (used in plastics) for the green revolution. The division is developing more value-added products.

(Note: This article was in the newsletter on May 18, 2023.)

Every time I start reading something like Warren Buffett has no interest in either buying or controlling Occidental Petroleum Corporation ( OXY ), then outcome articles about how Occidental Petroleum is expensive. It is almost like no one ever saw Netflix Inc. ( NFLX ) or Tesla, Inc. ( TSLA ) or any of a large number of high-fliers in this rather expensive market that does not seem to be getting cheaper anytime soon (despite a lot of fears to the contrary).

Not long after the stock stages a retreat, then Warren Buffett purchases more shares of the company. This game has a long way to go, as many have obviously forgotten that Mr. Buffett has permission to purchase 50% of the shares of the company. Yet the market appears to forget that the minute the purchases stop.

Then there is the part where Warren has no interest in controlling the company. But Mr. Buffett never controls any company he owns. Therefore, that statement does not advertise his intention as to how much he intends to purchase in the future. The Berkshire Hathaway Inc. ( BRK.A , BRK.B ) model has long been a decentralized one. That means that the companies run themselves and are in charge of things like succession and planning. Warren Buffett has long stated that he is not interested in a company he has to run, and in fact has only ever acquired companies he does not have to run.

What has been painfully obvious for a while is the stock can be purchased in the $50's (unless the price of oil moves significantly) while calls can likely be sold when purchases by Berkshire Hathaway subsidiaries push the stock into the sixties. If you honestly believe that a recession is around the corner, you could make a bundle doing this.

There is this attitude that the price-earnings ratio of twelve shown above is expensive. It actually is rather cheap compared to a whole bunch of industries. It is only because oil and gas as a whole is historically cheap compared to a lot of other choices. But a big company like Berkshire Hathaway does not have a lot of other choices.

Even for the average investor, the price earnings ratio shown above is really below average for the market. It does indicate a certain amount of uncertainty about the future. But that price-earnings ratio indicates that the uncertainty is way overdone.

Here is a presentation from Antero Resources Corporation ( AR ) on the growth of natural gas use. Occidental, by the way, is also a significant producer of natural gas. Natural gas has a lot of use in the green revolution. Both ethane and propane are raw materials for plastic (and other things) that are prominent in all those environmentally friendly materials.

So far, the "green revolution" has resulted in more use of natural gas than anyone ever planned. Even now, Antero and others see natural gas as the source material for the rapidly growing "green" hydrogen market that has now passed the into the billions sized. Companies I follow like Chart Industries, Inc. ( GTLS ) report business for their equipment used for these gases is booming.

It is a similar story for oi l demand. Oil demand is not slowing down; it is instead growing, and the growth is forecast for decades to come. Oil is used in lubricants, and green revolution materials as well. Exxon Mobil Corporation ( XOM ) and the other diversified giants have a chemical business to participate in this area of future growth. Besides, no one flies planes using solar panels, and no one is likely to any time soon.

The bottom line is that Occidental has a bright future as an upstream producer.

Occidental Petroleum Priorities

In the meantime, Occidental is not waiting for that bright future to come to them. Management is, instead, determined to lead the industry into the future.

Occidental presented several growth projects and, of course, mentioned that all-important chemicals division that produces some badly needed raw materials for the growing plastics market that is essential to the green revolution. It is also developing other "green materials" that management hopes will be value-added enough to provide a profit edge.

But after the growth projects and the maintenance projects comes the remaining cash flow that nearly always interests investors more than the rest of the presentation combined.

Last year was a debt reduction year. This year, the priorities shifted to the redemption of common and preferred stock. All the various growth and profitability enhancement projects are there to help speed up the deleveraging process that has been underway for some time.

Most investors want to know about dividends. Realistically, the past level of dividends is probably a few years away. That is probably the biggest deal that sways common stock price action. In a market that demands return of capital, the capital that is getting returned is the preferred stock redemption and the debt repayment, with shareholders getting a little something.

Occidental Petroleum Corporation management clearly is doing their promotional best work when they use fiscal year 2020 as a base because a lot of shareholders blame management for the stock price getting that low in the first place (so that the graph above on the left became possible). Clearly, management has made progress. Last year, in fact, management made unexpectedly good progress.

However, shareholders often want faster progress than a large acquisition can offer. Therefore, it will likely take some years for all the benefits of the acquisition to become apparent to investors.

The stock appears to clearly be on the "comeback trail." Warren Buffett clearly believes that the comeback appears to have quite a future ahead or he would not have invested in the stock. However, all of those investors that keep expecting the stock to head upward (a lot) need to keep in mind that Warren Buffett generally gives companies more time than does the average investor.

Based upon recent stock price action, the average investor gives Occidental Petroleum Corporation stock two minutes after the last Warren Buffett purchase. Then the sales begin because the stock "is not going anywhere." Yet Mr. Buffett does not purchase stocks that "do not go anywhere" as a general rule. He does have a few errors along the way. But his record is clearly darn good. So. investors could do far worse than follow him in. But if you follow him into an investment, then you need to consider his strategy (as well as the fact that he never sells).

You can do that trading strategy mentioned above if that is your strength, or you can invest in Occidental Petroleum Corporation as Mr. Buffett has been doing. Then stick around as a shareholder long term to see if he is right, because he is right a lot more than he is wrong. Now, with oil and gas the ride can be very bumpy, so nerves of steel are sometimes needed. But the patience of Mr. Buffett is very rare, as Mr. Market so willingly demonstrates. That is also what makes patience so valuable to an investor.

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