Should You Buy Occidental Petroleum While It's Below $50?
Berkshire Hathaway's cost basis on its Occidental position is above $50 a share.
The oil company expects to deliver roughly $1.5 billion of incremental annual free cash flow by 2027, unrelated to oil prices.
It has additional upside catalysts from rising oil prices and its carbon capture and storage business.
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Shares of Occidental Petroleum (NYSE: OXY) have dipped over the past year. They've fallen from a peak of more than $60 a share to less than $50. That's largely due to a decline in oil prices, which have fallen from over $80 a barrel to their recent level just above $70 per barrel.
Here's a look at several reasons why you should buy the oil stock while it's below $50 a barrel.
Warren Buffett's Berkshire Hathaway has been snapping up shares of Occidental in recent years. Buffett's company owns over 264.9 million shares (26.9% of Occidental's outstanding shares). Those shares are currently worth more than $12.6 billion. That's 4.4% of Berkshire's investment portfolio, making Occidental its sixth-largest position.
Berkshire's cost basis on its Occidental position is in the low $50s. Buffett's company has capitalized on opportunities to add to its position when the oil stock has dipped below $50 a share over the past year.
In addition to buying shares on the open market, Buffett's company holds warrants to buy another $5 billion of Occidental's stock at $59.62 apiece. His company received those warrants when it made its $10 billion preferred stock investment in Occidental in 2019 to support its purchase of Anadarko Petroleum.
Oil prices have a major impact on Occidental Petroleum's cash flow and stock price because its oil and gas business is its biggest moneymaker. While its fossil fuel business will continue to be its main profit driver, the company expects to capture a roughly $1.5 billion improvement in its free cash flow over the next few years, unrelated to oil prices.
Occidental Petroleum expects to reach an inflection point next year that will boost its free cash flow by $1 billion in 2026. It anticipates its chemical business (OxyChem) will deliver more than $450 million of incremental free cash flow in 2026 from the benefits of expansion projects, including its Battleground plant and the roll-off of the associated capital spending. Meanwhile, the company expects to capture about $450 million in additional earnings in its midstream business as legacy contracts roll off and it reduces capital spending in that segment. Finally, Occidental anticipates its debt repayment strategy will deliver over $135 million in annual interest expense savings in 2026. The company sees the total free-cash-flow improvement from these catalysts rising to around $1.5 billion in 2027.
This meaningful improvement will provide it with a higher foundation of stable base cash flows. Occidental can use that incremental excess free cash flow to grow shareholder value via dividend increases, repurchases (common shares and Berkshire's preferred stock), and additional debt repayment.
On top of the visible growth from Occidental's non-oil businesses, it has additional upside potential from higher oil prices. If the current conflicts in the Middle East or between Russia and Ukraine escalate to the point where major energy infrastructure gets destroyed, oil prices could spike. Likewise, an unexpected supply issue elsewhere (potentially caused by a natural disaster or human decision) could also drive up crude prices.
Meanwhile, Occidental is also building a carbon capture and storage business that could start paying off over the next year. It's starting up its initial direct air capture (DAC) unit, Stratos, this year and expects to be at full capacity by the middle of 2026. It has been commercializing the project by selling carbon credits to companies seeking to decarbonize their operations. Getting this project up and running will showcase the company's ability to commercialize this technology, which Occidental believes could be a big moneymaker over the long term. It would prove to the market that the company can continue developing DAC projects, which would enhance its long-term growth prospects.
The dip in Occidental's stock price has caused it to trade below Buffett's purchase level. On top of that, the company has many upside catalysts, many of which don't rely on improving oil prices. Given all that, the dip below $50 looks worth buying for those seeking lower-risk exposure to the oil market.
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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.
Should You Buy Occidental Petroleum While It's Below $50? was originally published by The Motley Fool
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