The energy sector is experiencing a surge of activity as geopolitical tensions in the Middle East send ripples through global markets. Concerns about potential supply disruptions have pushed crude futures (CLX24) toward one-month highs recently, but demand concerns amid China's economic slump have kept a lid on short-term rallies.
Amid this oil price volatility, some energy investors are seeking undervalued dividend stocks within the sector. One such opportunity is none other than the same top energy stock that's caught the eye of Warren Buffett, the legendary value investor from Omaha.
Known for his ability to identify promising investments, Buffett has taken a substantial stake in this dividend-paying energy stock, which appears to be trading at a discount compared to its peers and has potential to gain ground in the sector's ongoing rally.
But what makes this particular investment so appealing in the current market landscape? Let's examine why this Buffett-backed stock might be an overlooked bargain, and explore the factors that could make it a potentially lucrative investment opportunity.
OXY's Financial Snapshot
Valued at $48.5 billion, Houston-based Occidental Petroleum (OXY) is a major player in the oil and gas industry, with its integrated operations encompassing exploration, production, and petrochemical manufacturing.
OXY has underperformed on a year-to-date basis, down 9.7% so far in 2024. The shares are down 16.3% over the past 52 weeks, and have pulled back 24% from their April high.
However, OXY was one of the few stocks that Buffett kept buying during Q2, even as he sold shares of oil major Chevron (CVX). OXY now accounts for 4.3% of Berkshire Hathaway's (BRK.B) equity portfolio, and their stake in the energy company is worth more than 27%.
Occidental's forward EV/EBITDA ratio, a key valuation metric, now stands at 5.55 - below the energy sector median of 6.03x, which suggests that OXY looks undervalued relative to its peers. Plus, OXY's current valuation is a discount to its own historical averages. This discrepancy could present an opportunity for value-oriented investors looking to follow Buffett's lead in the energy sector.
Adding to its appeal, OXY has maintained its commitment to shareholder returns, another characteristic often appreciated by Buffett. Occidental offers a quarterly dividend of $0.22 per share, yielding approximately 1.61%. While not the highest in the sector, this dividend provides a consistent income stream for investors to help buffer against energy market turbulence.
OXY's financial performance further underscores its resilience. The Q2 2024 earnings report, released on Aug. 7, revealed net income of $1.0 billion, or $1.03 per diluted share, with operating cash flow of $2.4 billion. Quarterly free cash flow was $1.3 billion. Production exceeded expectations at 1,258 Mboed, while OxyChem and midstream operations outperformed guidance.
OXY's Strategic Moves
Occidental Petroleum is making some interesting moves that are worth paying attention to. The company is clearly not content with just sticking to its traditional oil and gas operations. In a recent twist, OXY teamed up with BHE Renewables, a Berkshire Hathaway Energy subsidiary, to venture into the world of lithium extraction. This joint venture aims to commercialize TerraLithium's Direct Lithium Extraction technology, potentially tapping into the lucrative electric vehicle (EV) supply chain. It's a bold move that shows OXY is thinking beyond just fossil fuels.
But don't think for a second that OXY is abandoning its roots. The company acquired CrownRock, L.P., a deal that wrapped up in August 2024. This acquisition is all about beefing up OXY's presence in the low-cost Permian Basin, which could give a nice boost to its production and bottom line. It's clear that OXY is playing a balancing act, keeping one foot firmly planted in its core business while dipping its toes into new waters.
Now, let's talk about the elephant in the room: debt. OXY has been working hard to get its financial house in order, and the results are starting to show. In the third quarter of 2024, the company managed to slash $3 billion off its debt. That's no small feat, and it's the kind of move that tends to make investors sit up and take notice.
To keep this debt-reduction momentum going and to help finance the CrownRock deal, OXY has been selling off some assets. They recently offloaded some Delaware Basin properties for a cool $818 million and have completed other sales totaling $152 million in 2024. These are part of a bigger plan to divest $4.5 billion to $6 billion worth of assets. It's a strategy aimed at killing two birds with one stone: reducing debt and funding growth.
What Analysts Are Saying About Occidental Petroleum
As investors eagerly await Occidental Petroleum's next earnings report - scheduled for Nov. 12, after the market close - analysts are projecting full-year 2024 earnings of $3.48 per share, down about 6% annually, with growth to $4.16 per share expected for fiscal 2025.
The market sentiment surrounding OXY is generally positive. Analysts have set a mean price target of $66.04, representing a potential upside of approximately 22.5%. Among the 23 analysts offering recommendations, the consensus leans towards a "Moderate Buy." Breaking this down further, 6 analysts are bullish with a "Strong Buy" rating, 1 suggests a "Moderate Buy," 15 advise a "Hold," and 1 lone voice calls for a "Strong Sell."
The Bottom Line on OXY Stock
In conclusion, Occidental Petroleum (OXY) presents an intriguing opportunity for investors looking to follow in Warren Buffett's footsteps. With its attractive valuation, steady dividend, and strategic moves into both traditional and emerging energy markets, OXY seems poised for potential growth. The company's efforts to reduce debt and optimize its portfolio, coupled with its expansion in the Permian Basin, demonstrate a forward-thinking approach to navigating the evolving energy landscape.
On the date of publication, Ebube Jones 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.
