Energy stocks are trading at a relatively cheap valuation in September 2024, primarily due to lower oil prices. However, the pullback offers shareholders an opportunity to buy the dip and benefit from outsized gains when market sentiment improves. One such energy stock that's a part of Warren Buffett’s Berkshire Hathaway (BRK.A) equity portfolio is Occidental Petroleum (OXY).
Valued at $46.15 billion by market cap, Occidental Petroleum is engaged in acquiring, exploring, and developing oil and gas properties in the U.S., Middle East, Africa, and Latin America. It has three primary business segments, namely: Oil and Gas, which explores, develops, and produces oil (CLV24) and condensate, natural gas liquids, and natural gas (NGZ24); Chemical, which manufactures and markets basic chemicals, including chlorine, caustic soda, calcium chloride, and ethylene, among others; and Midstream and Marketing, which gathers, processes, transports, stores, and markets oil, condensate, NGLs, and natural gas.
Warren Buffett is Bullish on Occidental Petroleum
In the last few years, Berkshire Hathaway has increased its position in Occidental Petroleum, and currently owns almost a third of the oil and gas producer's total outstanding shares, according to SEC filings. In June 2024, Berkshire brought 7.3 million shares of Occidental Petroleum across nine consecutive trading sessions at roughly $60. Today, OXY stock is priced at $51.75 and trades 55% below all-time highs.
Occidental Petroleum is the sixth-largest holding in Berkshire’s portfolio. Notably, Berkshire owns $10 billion of OXY preferred stock with warrants to purchase almost 84 million shares for $5 billion, indicating a purchase price of $59.62.
OXY stock has trailed the broader markets this year, falling more than 13% in 2024.
Given its annualized dividend payout of $0.88 per share, Occidental Petroleum offers a dividend yield of 1.69%.
How Did Occidental Petroleum Perform in Q2 of 2024?
In Q2 of 2024, Occidental Petroleum delivered its highest quarterly production in four years. It exceeded the midpoint of its production guidance, generating $1.3 billion in free cash flow, primarily due to solid execution across business segments.
Occidental Petroleum exceeded its production expectations for onshore new wells and continues to achieve operational efficiencies as it executes its capital program. In the first six months of 2024, Occidental Petroleum reported a 10% improvement in unconventional well costs compared to the year-ago period, putting the company ahead of its cost savings plan.
According to the energy heavyweight, Occidental Petroleum emphasized its cost savings were achieved through increased frac utilization, operational efficiency gains, and facilities optimization.
Addressing the Q2 results, Occidental Petroleum CEO Vicki Hollub stated, “The momentum we are generating on development costs across many facets should translate to capital efficiency improvements as we look toward the end of the year and into 2025. In addition to improved capital efficiency and continued well performance leadership, our teams have driven down lease operating expenses across our domestic assets to enhance our cash margins.”
What's Next for OXY Stock?
Occidental Petroleum closed the acquisition of CrownRock, adding a high-margin asset with a Tier-I inventory upside. The company expects the acquisition to boost operating margins with optimization opportunities across multiple verticals.
OXY aims to become a market leader in carbon capture and sequestration (CCS), a market that might grow to a massive $3 trillion over time. The U.S. Department of Energy just awarded Occidental with $650 million to accelerate the development of direct air capture hubs, supporting its CCS expansion plans.
Analysts tracking the stock expect adjusted earnings to expand from $3.61 per share in 2024 to $3.95 in 2025. So, priced at 13 times forward earnings, OXY stock is not too expensive.
Out of the 21 analysts covering OXY stock, six recommend “strong buy,” one recommends “moderate buy,” 13 recommend “hold,” and one recommends “strong sell.”
The average 12-month target price for OXY stock is $70.59, indicating an expected upside potential of over 36% from current levels.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
