Do you want to find profitable oil stocks? Pay attention to what Warren Buffett buys. Its holding company, Berkshire Hathawaynow has several oil stocks. Two in particular are worth exploring further now.
Buffett is betting big on this oil stock
As of last quarter, Berkshire Hathaway held approximately 250 million shares of Western oil (NYSE: OXY) worth around $14 billion. Given that Occidental only has a $57 billion market share, Berkshire’s stake translates to a nearly 25% stake in the entire company.
Occidental has many strengths in today’s operating environment. Analysts at Scotiabank recently upgraded the stock to outperform the sector with a price target of $90 per share. With the current stock price sitting just above $60, that would represent nearly 50% total upside.
What is it about Occidental that Berkshire and Scotiabank like so much? The company is certainly poised to benefit from a “higher, longer” oil price environment. Its $12 billion purchase of Permian Basin oil producer CrownRock, for example, is expected to generate $1 billion in free cash flow in its first year, based on $70 per barrel crude.
Oil prices today are closer to $80 per barrel and, given political instability in many key regions of the world, there is reason to believe that prices will remain high for some time. Much of Occidental’s production, including CrownRock’s assets, is in areas in steep decline. But high oil prices should keep these assets highly profitable.
Occidental is not just an upstream energy producer. It also has stakes in value-added businesses such as chemicals and refineries. Over the next few years, the company expects to free up an additional $1 billion in annual free cash flow through cost savings from its midstream and downstream assets, as well as reductions in its total debt level.
Keep in mind that Berkshire has held shares of Occidental since the first quarter of 2022, meaning the company has already made huge gains on its investment. Yet he has yet to downgrade his position, which suggests that someone at Berkshire – perhaps even Buffett himself – still thinks there’s plenty of upside potential to be realized.
Pay attention to this $19 billion bet
Berkshire is betting even more on Chevron (NYSE: CVX) stock than on Occidental. Its position in Chevron is currently valued at nearly $19 billion. Berkshire has also held its stake in Chevron longer than its position in the West, purchasing shares for the first time in 2020.
What makes Chevron worth a $19 billion investment? The main reason to love this company is its operational excellence. All you have to do is compare Chevron’s stock price to oil prices to get an idea. Over the past decade, oil prices have fallen by about 18%, but Chevron stock has resurrected by almost 100%.
There’s clearly something special about a company that can add significant shareholder value over a period when the price of its core product is deteriorating.
What exactly does Chevron do so well? Its two main advantages lie in operational discipline and capital management. This year, for example, its production profile is expected to grow 4% to 7% thanks to increased productivity at its Permian Basin and Denver-Julesburg assets. An improvement in well performance is expected even if unit costs remain stable. This combination has allowed Chevron’s upstream profits per barrel to continually increase, from around $7 per barrel in 2019 to around $10 per barrel today.
Chevron’s capital management, meanwhile, is exemplary, something Buffett undoubtedly admires. The company has demonstrated a strong ability to allocate shareholder capital, with impressive results. return on capital employed who lead the oil majors. Management expects free cash flow to double between 2022 and 2027, while repurchasing 3% to 6% of shares each year. As an added bonus, the stock also offers a 4% annual dividend.
Both Occidental and Chevron will face operational challenges in the coming years. Occidental will be tasked with justifying its $12 billion acquisition of CrownRock, while Chevron is involved in its own takeover: a $53 billion all-stock deal for Hesse.
But if oil prices stay where they are, we can expect both companies to do quite well. Occidental will have greater leverage if oil prices rise, while Chevron has proven its ability to generate returns for shareholders even if oil prices weaken, making the two stocks a complementary choice for oil investors and gas workers.
Should you invest $1,000 in Occidental Petroleum right now?
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Berkshire Hathaway and Chevron. The Motley Fool recommends Bank Of Nova Scotia and Occidental Petroleum. The Motley Fool has a disclosure policy.
The Smartest Oil Stocks to Buy with $1,000 Right Now was originally published by The Motley Fool
