Warren Buffett's company, Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B), can't seem to get enough of Occidental Petroleum(NYSE: OXY). The conglomerate recently purchased another 8.9 million shares of the oil company for $405 million. Buffett's company now owns over 264 million shares worth almost $12.5 billion, totaling more than 28% of Occidental's outstanding shares.
Here's a look at the likely factors driving Berkshire Hathaway to scoop up so much of the oil stock and some things to consider before you do the same.
Backing up the truck to buy a beaten-down stock
Buffett is a value investor at heart. He likes to buy stocks when they trade below their intrinsic value. For Occidental Petroleum, that seems to be at a price point around or below $53 per share, which is Berkshire's average cost for the position, according to an estimate by Barron's. With the oil stock recently hitting its lowest price in three years at around $46 per share, Buffett's company pounced and bought more shares.
The main factor weighing on the oil stock has been weaker oil prices. West Texas Intermediate (WTI), the primary U.S. oil price benchmark, has declined after a strong start to the year. It soared from over $70 a barrel at the beginning of the year to nearly $90 by mid-April. It has since cooled off considerably and was recently below $70 a barrel.
Investors are worried that crude oil prices could continue to fall over the next year. The incoming Trump administration wants oil companies to produce more oil to boost supply. That increased supply would be likely to push down prices, which could help slow the rise of inflation.
Occidental is more than an oil story
Falling oil prices would undoubtedly weigh on Occidental's earnings and cash flow. That was the case in the third quarter. The company sold its oil at an average price of $75.33 per barrel, 6% below the prior quarter. As a result, the pre-tax income of its oil and gas segment slumped from $1.6 billion to $1.2 billion.
However, Occidental has several upside catalysts unrelated to oil prices. It recently closed its needle-moving acquisition of CrownRock, which significantly enhanced its operations in the Permian Basin that runs through parts of Texas and New Mexico. The company expects the deal to add $1 billion to its annual free cash flow if WTI averages $70 a barrel. It will still be strongly accretive if oil prices are below that level.
On top of that, Occidental has several non-oil catalysts that should add more than $1 billion in incremental annual free cash flow by the second half of 2026, with the full benefit expected the following year. They include:
Western Midstream: Incremental cash distributions from its investment in Western Midstream should boost its annual cash flow by $240 million in the near term. Occidental owns a 44.8% interest in the master limited partnership (MLP) plus a 2% stake in its operating business. The MLP boosted its distribution payment by 52% earlier this year and should be able to continue increasing it in the coming years.
Debt reduction: Occidental plans to retire $3.7 billion of debt as it matures through 2026. That will steadily lower its interest expenses, saving it $180 million annually by 2027.
Midstream: The company's midstream business will benefit as several legacy contracts expire. That will enable it to capture higher earnings from this segment, to the tune of about $400 million by 2027.
OxyChem: Occidental's OxyChem segment is investing heavily in enhancing several petrochemical plants and modernizing and expanding its Battleground facility. These investments should boost this segment's free cash flow by $325 million by 2027.
On top of all that, Occidental is investing in building out a carbon capture and storage (CCS) platform. It's constructing the world's largest direct air capture facility in the Permian Basin, which should be operational by the middle of next year. It has several more facilities under development. The company believes it could eventually make as much money capturing and storing carbon dioxide as it currently produces from oil and gas.
That's about $2 billion in incremental annual free cash that should flow into the company over the next several years, with additional upside potential from its CCS business. These drivers should help mute some of the impacts of lower oil prices while reducing the volatility of its cash flows.
Is Occidental right for you?
Buffett and his team have a high conviction in Occidental Petroleum's ability to grow shareholder value in the future. That's why they have been willing to add to a losing position. Given the company's non-oil growth catalysts, Occidental could be a very lucrative investment even if oil prices remain weaker.
However, oil stocks aren't for everyone. They can be very volatile, since oil prices can move rather unexpectedly. On top of that, they aren't the most environmentally friendly companies, though Occidental is working to change that by investing heavily in CCS. So while Buffett has a high conviction in Occidental, you'll need to evaluate whether it is a good fit for you.
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Matt DiLallo has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
