Buffett's Patience: Why He Keeps Investing in Occidental Petroleum Despite Stock Plunge

Warren Buffett, the renowned investor and CEO of Berkshire Hathaway, has been steadily increasing his stake in Occidental Petroleum (OXY) despite the stock's recent plunge of more than 30%. As of December 2024, Berkshire Hathaway owns approximately 264 million shares, representing around 28.4% of the outstanding shares. This significant investment begs the question: why is Buffett so bullish on Occidental Petroleum, even as the stock price continues to decline?



1. Strong Fundamentals and Cash Flow Generation: Buffett appreciates Occidental's focus on profitability and sustainable cash flows. The company has been prioritizing profits over production, which aligns with Buffett's investment philosophy. Occidental's management has set clear objectives for its free cash flow, including debt reduction, dividend payments, and share buybacks. As of the third quarter of 2023, Occidental redeemed approximately $1.5 billion in Berkshire-owned preferred shares and paid out around $4 per common share in dividends, translating to a significant cash yield for Buffett's firm.
2. Geopolitical Moat and Stable Oil Supply: Buffett likely sees Occidental's wide geopolitical moat as a significant advantage, leading to a stable oil supply from the Permian Basin. This hedge against instability in the Middle East contributes to steady returns. Occidental has forecasted oil prices to remain between $80 to $85 into 2025, which should contribute to steady returns.
3. Production Growth and Efficiency: Occidental has consistently surpassed its production guidance, demonstrating strong growth potential. This efficiency and ability to exceed expectations likely appeal to Buffett's investment strategy. For instance, Occidental's production rose by 8.5% in 2024, and its proven reserves increased from 4 to 4.6 billion barrels equivalent year-on-year, thanks to the acquisition of CrownRock.
4. Potential for Acquisition or Consolidation: Some speculate that Buffett's increasing stake in Occidental could position the company as an acquisition target in the future, especially given the recent consolidations in the oil and gas industry. A merger with a super-major like Exxon (XOM) or Chevron (CVX) may be an end-game in Buffett's mind.

In conclusion, Warren Buffett's continued investment in Occidental Petroleum reflects his confidence in the company's management, its strong cash flow generation, and its potential for long-term value in the energy sector. Despite the stock's recent decline, Buffett remains bullish on Occidental's fundamentals, geopolitical moat, and stable oil supply from the Permian Basin. By investing in Occidental, Buffett is positioning Berkshire Hathaway to benefit from the company's long-term growth and cash returns.