Lately, there aren’t many stocks that Warren Buffett has found interesting enough to add Berkshire HathawayIt is (NYSE:BRK.A) (NYSE:BRK.B) $385 billion portfolio. Buffett, through Berkshire, has made only a handful of purchases in the current period. bull market.
In fact, Buffett has sold more shares than it bought in each of the last six quarters. Some of its biggest sales last quarter included part of its main holding, Appleas well as Berkshire’s entire position in Paramount Worldwide shares and the remainder of Berkshire’s stake in HP. But it has steadily strengthened some positions in 2024, including one of its biggest holdings.
So far in June, Buffett has spent an additional $435 million on Western oil (NYSE: OXY) to make it the sixth largest position in Berkshire.
More recent documents filed with the Securities and Exchange Commission reveal purchases by Occidental Petroleum between June 5 and June 17. Buffett acquired shares of Occidental when they were trading around $60 per share, and investors may want to follow his lead.
A stock Buffett plans to hold forever
Buffett initially invested in Occidental in 2019, when he purchased $10 billion in preferred stock directly from the company for Berkshire Hathaway. This $10 billion investment helped fund Occidental’s acquisition of Anadarko, strengthening its position in the Permian Basin.
While this acquisition left Occidental loaded with debt just before a difficult time for the energy market that no one could have predicted (the COVID-19 pandemic), management has navigated this difficult environment admirably. It suspended its dividend and strategically sold assets to reduce its balance sheet, and it’s back on solid footing.
Buffett has since strengthened his position at Occidental. With the latest $435 million purchase, Berkshire Hathaway now owns approximately 28.8% of the shares outstanding, or a stake worth approximately $15.9 billion. She also still owns about $8.5 billion in preferred stock, which includes warrants to buy more of the company’s common stock at $59.62 a share (it currently trades around 62.90 dollars).
In his latest letter to Berkshire shareholders, Buffett praised Occidental CEO Vicki Hollub, saying the energy stock was a holding he planned to hold indefinitely. “Under the leadership of Vicki Hollub, Occidental is doing the right thing for its country And its owners,” Buffett wrote. “We particularly value his vast U.S. oil and gas holdings, as well as his leadership in carbon capture initiatives.”
Occidental will strengthen its leadership position in the Permian Basin this year with its $12 billion acquisition of CrownRock, which is expected to close in the third quarter. Hollub will likely follow the same pattern as the much larger Anadarko acquisition, selling non-core assets to reduce the amount of debt on Occidental’s balance sheet. It is already considering selling Permian assets worth more than $1 billion, according to a Reuters report in May.
A big bet on oil prices
Although Occidental is an integrated energy company, most of its revenue comes from drilling. Its business consists of acquiring land and separating oil from rock. This means that its profits are highly dependent on the price of oil.
When it announced the CrownRock acquisition late last year, it estimated it could generate $1 billion in additional annual free cash flow assuming oil prices stay above $70 a year. barrel.
Hollub now expects oil prices to remain in the $80-$85 range through 2025. Oil prices took a hit after OPEC+ members agreed earlier this month on a plan that would extend their production cuts until 2025, but which would also allow eight member countries to reduce their production. to start easing their voluntary reductions from October. However, crude prices quickly recovered to around $80.
Buffett took the opportunity to buy Occidental when oil prices fell, and he has already benefited from the slight 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 lead?
As mentioned, Buffett buys Occidental shares virtually every time they drop below $60. At that price, the stock trades at about 14 times forward earnings. That puts it firmly in value stock territory, but its valuation isn’t as attractive as some other oil producers and integrated energy companies.
But Occidental, under Hollub, is being much more aggressive in growing its bottom line through acquisitions and cost cutting. That could translate into much better long-term earnings growth, especially if oil prices continue to rise. His strategy carries considerable risk, but it also comes with much greater long-term growth potential. In the meantime, the company is certainly stable enough, generating enough cash to continue to grow its operations while paying a nice dividend.
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Adam Levy has positions at Apple. The Motley Fool holds positions and recommends Apple, Berkshire Hathaway and HP. The Motley Fool recommends Occidental Petroleum. The Mad Motley has a disclosure policy.
Warren Buffett Just Bought $435 Million of This Stock and Plans to Hold It Forever was originally published by The Motley Fool
