2023-11-03 16:30:00 ET
Summary
- Berkshire Hathaway increased its stake in Occidental Petroleum to 25.8%, showing increasing confidence in its long-term performance.
- Occidental's stock price has remained steady despite recent volatility in oil prices and geopolitical tensions in the Middle East. I gleaned that buying sentiment remains robust.
- Occidental is expected to report sequential improvement in its adjusted EPS through Q1'24. The underlying oil prices are also well-supported and have recovered their medium-term uptrend.
- I argue why OXY's best-in-class "A" profitability and the Buffett Put offer a formidable defense for dip-buyers looking to follow his allocation.
- As OXY last traded close to Buffett's $63 average cost for his recent purchases, investors shouldn't miss the current opportunity to buy more.
Occidental Petroleum Corporation ( OXY ) has attracted debate again in the investing community, as Berkshire Hathaway Inc. ( BRK.A ) ( BRK.B ) increased its stake in the leading oil and gas producer. Investors are likely aware that the Warren Buffett-led company now holds a 25.8% stake in Occidental, as Buffett capitalized on OXY's recent market volatility to add exposure.
As such, Berkshire now holds 228M shares in Occidental, corroborating Buffett's increasing confidence in the medium- and long-term performance of Occidental. With an average cost basis amounting to about $63 per share, investors have an opportunity to join Buffett, as OXY last closed at $63.30.
I last updated Occidental in mid-August, as I also upgraded my thesis. OXY's total return is approximately in line with the S&P 500's ( SP500 ) performance since then, as OXY pulled back from its mid-September highs. The recent surge in oil prices ( CO1:COM ) ( CL1:COM ) in early October has also reversed, as investors downplayed the scale of the brewing conflict in the Middle East between Israel and Hamas.
However, I'm not worried about the lack of a near-term spike in oil prices. I believe the posture is appropriate, as last year's Russia-Ukraine conflict should have informed us that such spikes aren't sustainable. It's also not conducive for investors looking to accumulate positions (like Warren Buffett) progressively. Also, the surge in long-term yields recently ( US10Y ) has raised the specter of something " breaking " in the economy, as I enunciated in a recent article. The fear is that it could engender an unanticipated credit crunch before a hard landing potentially follows.
Also, Saudi Arabia and Russia have spare capacity, notwithstanding the potential escalation of the Middle East conflict. As such, unless Iran is directly involved, threatening its production capacity, I believe oil prices are expected to remain less volatile than last year's conflict.
Exxon Mobil Corporation ( XOM ) and Chevron Corporation ( CVX ) completed back-to-back acquisitions in October, exercising their premium valuations to improve the quality and volume of their upstream plays. I also discussed Exxon's acquisition of Pioneer Natural Resources Company ( PXD ) and Chevron's acquisition of Hess Corporation (see here and here ). While Occidental was reported to be one of the considered companies to be acquired, the interest wasn't followed through. Although it led to momentary volatility following the deals by Exxon and Chevron, dip-buyers returned this week, suggesting strong support assessed at the current levels.
Occidental is expected to report its third-quarter or FQ3 earnings release on November 7. Notably, we should expect a QoQ improvement in Occidental's adjusted EPS, recovering to $0.86. As such, analysts' estimates suggest Occidental's earnings could have bottomed out in Q2 as it reported an adjusted EPS of $0.68. Moreover, Occidental is expected to report sequential improvement in its operating performance through Q1'24, with its adjusted EPS reaching $1.37.
Given the company's exposure to oil price cyclicality, I believe analysts have likely baked in more optimistic market forecasts, suggesting a deep recession isn't anticipated. Also, I've been bullish on the energy sector ( XLE ) since March 2023. With oil prices having regained their medium-term uptrend, I don't anticipate imminent risks to that thesis playing out. As such, I have confidence that analysts' optimism isn't misplaced.
OXY price chart (weekly) (TradingView)
Notably, OXY dip-buyers helped sustain a higher low at its early October bottom ($60 level). As such, OXY seems ready to move past its June lows ($55 level), although the $68 critical resistance level remains in play.
Despite that, OXY seems well-primed to continue its upward recovery, although I don't expect a recovery toward its 2022 highs anytime soon. However, a slow and steady accumulation is constructive for buyers looking to accumulate, allowing investors to increase their allocation over time. While OXY isn't undervalued (assigned a "D-" valuation grade by Seeking Alpha's Quant), its best-in-class "A" profitability grade should continue to sustain confidence in its business model.
Corroborated by Buffett's confidence at the low $60s level, I encourage investors looking to add more exposure to not miss the buying opportunity again.
Rating: Maintain Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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Occidental Petroleum: Learn From Buffett And Ignore His Naysayers