Occidental Petroleum: Warren Buffett's Next Move?

Occidental Petroleum Corporation (NYSE: OXY) stock has been on a rollercoaster ride, reaching its 52-week low of $45.17 on May 12, 2024. The stock's recent performance has raised questions about its future prospects and whether Berkshire Hathaway, with its significant stake in the company, will buy more shares. This article will explore the key factors driving Occidental Petroleum's stock price, Warren Buffett's investment philosophy, and the potential risks and opportunities in the energy sector.

Occidental Petroleum's Stock Price Performance

Occidental Petroleum's stock price has been volatile, with several factors contributing to its decline. Some of the key factors include:

1. Oil Price Volatility: The global oil market has been volatile, with prices fluctuating due to geopolitical tensions, supply and demand dynamics, and changes in OPEC+ production policies. Occidental, as an oil and gas exploration and production company, is directly affected by these price fluctuations.
2. Earnings Miss: In the third quarter of 2024, Occidental reported earnings per diluted share of $0.98, missing analysts' expectations of $1.00. This earnings miss may have contributed to the stock's decline.
3. Debt Reduction Efforts: Occidental has been focusing on reducing its debt, which has led to lower capital expenditures and potentially slower growth in production. This focus on debt reduction may have negatively impacted investor sentiment.
4. Market Sentiment: The broader energy sector and the stock market as a whole have experienced periods of weakness, which may have contributed to Occidental's stock price decline.

Warren Buffett's Investment Philosophy and Occidental Petroleum

Warren Buffett's investment philosophy is centered around value investing, which involves buying undervalued companies with strong fundamentals and holding them for the long term. Occidental Petroleum's current valuation and fundamentals appear to align with Buffett's investment philosophy, as indicated by his significant stake in the company.

Occidental Petroleum's fundamentals include:

* Strong operational performance, with operating cash flow of $3.8 billion and operating cash flow before working capital of $3.1 billion in the third quarter of 2024.
* Capital spending of $1.7 billion and contributions from noncontrolling interest of $47 million, resulting in quarterly free cash flow before working capital of $1.5 billion.
* Total company production of 1,412 Mboed, which exceeded the mid-point of guidance by 22 Mboed.
* Midstream and marketing segment exceeding the mid-point of guidance for pre-tax adjusted income by $145 million.
* OxyChem segment exceeding guidance with pre-tax income of $304 million.
* Earnings per diluted share of $0.98 and adjusted earnings per diluted share of $1.00.
* Repayment of $4.0 billion of debt, achieving nearly 90% of Occidental's short-term debt reduction target.

These fundamentals suggest that Occidental Petroleum is a well-managed company with strong financial performance and growth prospects. Additionally, Occidental Petroleum's valuation appears to be attractive, with a forward P/E ratio of around 11.95, which is below its historical average and may indicate that the stock is undervalued.

Potential Risks and Opportunities in the Energy Sector

Occidental Petroleum faces several potential risks and opportunities in the energy sector that could impact Berkshire Hathaway's investment strategy. Some of these factors include:

1. Commodity Price Volatility: Fluctuations in oil and gas prices can significantly impact OXY's earnings and cash flow. Berkshire Hathaway, as a long-term investor, may be willing to tolerate this volatility, but it could also lead to short-term fluctuations in the stock price, affecting BRK's investment value.
2. Regulatory Risks: Changes in energy regulations and policies can impact OXY's operations and profitability. Berkshire Hathaway's investment strategy may need to adapt to these regulatory changes to maintain its investment's value.
3. Geopolitical Risks: Geopolitical events, such as conflicts or sanctions, can disrupt energy supply chains and impact oil and gas prices. These events could pose risks to OXY's operations and profitability, affecting BRK's investment. However, Berkshire Hathaway's diversified portfolio may help mitigate these risks.
4. Technological Advancements: The energy sector is evolving with advancements in renewable energy and carbon capture technologies. OXY's ability to adapt to these changes and maintain its competitive edge will be crucial for its long-term success. Berkshire Hathaway's investment strategy may need to consider these technological advancements and their potential impact on OXY's business model.
5. Debt Reduction and Financial Health: OXY's focus on reducing its debt levels can improve its financial health and resilience to market fluctuations. Berkshire Hathaway's investment strategy may benefit from OXY's improved financial position, as it could lead to better dividend payouts and increased share buybacks.
6. Mergers and Acquisitions (M&A): OXY's M&A activities can present both opportunities and risks. Strategic acquisitions could expand OXY's operations and increase its earnings, while poorly executed deals could lead to losses and dilution of shareholder value. Berkshire Hathaway's investment strategy may need to consider OXY's M&A activities and their potential impact on the company's long-term prospects.

In conclusion, Occidental Petroleum's potential risks and opportunities in the energy sector could impact Berkshire Hathaway's investment strategy by influencing the stock's volatility, regulatory risks, geopolitical risks, technological advancements, financial health, and M&A activities. By carefully monitoring these factors and maintaining a long-term perspective, Berkshire Hathaway can make informed decisions about its investment in OXY. As Warren Buffett once said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Occidental Petroleum's fundamentals and valuation may make it an attractive investment opportunity for Berkshire Hathaway, but investors should remain vigilant and consider the potential risks and opportunities in the energy sector.