Warren Buffett just bought this stock of oil in a market sell-off; Should you?

Warren Buffett and his investment team are profiting from a massive sell-off in the stock market, but you might be surprised to find out about their latest purchases. It’s not technical, financial, or consumer stock Berkshire Hathaway (BRK.A -0.83%)(BRK.B -0.84%) He has big stakes in it. It’s an oil stock – Buffett doesn’t seem to take his hands off it.

A June 22 regulatory filing revealed that Berkshire Hathaway bought 9.6 million shares in Occidental Petroleum (OXY 0.57%) Between June 17 and June 22, it is estimated to be worth $529 million. After an unstoppable year-round rally, Occidental’s stock has only taken a breather now — in the past two weeks or so. At Thursday morning prices, its value is down more than 20% since hitting 52-week highs in late May.

Apparently Buffett saw an opportunity in the decline in oil stocks, and Berkshire now owns approximately 152.7 million Occidental shares. Notably, Berkshire also owns shares in chevron, but it has not reported any transaction in Chevron shares so far this month. So, what got Buffett excited about Occidental, and should you also follow the legendary investor and acquire stock in oil stocks today?

Buffett’s big bet on oil prices

Many were surprised when Buffett first revealed his position at Occidental in March. After all, he’s never been a fan of cyclical stocks, and most of the stocks in Berkshire Hathaway’s portfolio have been well-established, stable companies that are also cash flow machines.

Buffett turned out to be optimistic about the oil markets, and Occidental’s financial position suited his taste.

To be sure, although he first disclosed his position in Occidental’s common stock only in March, he has already taken orders for 83.9 million shares in the oil company at $59.62 per share. Berkshire received those guarantees when it bought 8%-yielding preferred stock in Occidental in 2019 to fund the company’s acquisition of Anadarko.

At the time, Buffett told CNBC that his bet on Occidental was a long-term bet on oil prices, as they largely determine whether oil stocks are “a good investment over time.”

In his words, he began loading Occidental’s common stock in March as oil prices jumped higher. Occidental’s cash flow has boomed, too, which is perhaps one of the biggest reasons Buffett loves this stock of oil so much. And of course there is a return.

Occidental has become a stronger and leaner company

In the first quarter, Occidental Free Cash Flow (FCF) more than double On an annual basis, it reached a quarterly high of $3.3 billion. The oil giant used the windfall gains to pay off debts of equal value.

Earlier in the year, Occidental set near-term capital allocation targets which included prioritizing $5 billion in debt repayment, followed by dividend growth and share repurchases.

Now that Occidental is close to its debt target, I expect the company to begin buybacks of $3 billion in stock in the second quarter. This should be the starting point for earnings growth. On Occidental’s first-quarter earnings call, CEO Vicki Hollub stressed that reducing debt and the number of outstanding shares should make Occidental’s earnings more sustainable while positioning the company for its “timely increase.”

In that regard, Occidental already increased its annual dividend earlier this year by a huge margin to $0.52 per share versus just $0.04 per share in 2021. Of course, management boosted the dividend only because it believes it is sustainable. It is also now seeing profits rise even more over time.

Why Buffett loves Occidental stock, and so do you

Warren Buffett is a huge fan of dividend yields, and Berkshire Hathaway is full of fixed dividend stocks, most of which are high yielding.

Occidental stock may only do 0.9% right now, but a strong balance sheet in the making with strong cash flow and earnings growth potential makes it an interesting stock to play the oil boom. As one of the largest oil producers in the United States, Occidental has highly leveraged oil price cash flows, which is great in the current high oil price environment.

Above all, with Occidental stock now trading about 5.6 times lagging 12-month FCF versus Chevron stock, which is trading about 11.3 times FCF, Buffett might see value in oil stocks right now.

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