Your Chance To Co-Invest with Buffett, and Win Big?
Warren Buffett’s Berkshire Hathaway (BRK.A)(BRK.B) first bet on Occidental Petroleum Corp (OXY) three years ago, but it wasn’t until 2022 that it aggressively increased its stake.
In late September, Berkshire purchased another 5.99 million shares, resulting in a 20.9% stake in the company. Berkshire now owns around 194.4 million shares, valued at approximately $11.35 billion. However, he won Federal Energy Regulatory Commission (FERC) approval to purchase up to 50% of the stock.
The signs are clear that Buffett has plans to buy the firm outright, so is it too late to co-invest alongside Buffett and buy this oil giant?
Choosing the right oil stocks
The global economy depends on oil and gas companies like Occidental Petroleum but a sudden shift in supply and demand can cause oil prices to plummet or skyrocket, much like we saw in early 2022 after Russia invaded Ukraine.
As an investor, you must also be mindful of where the energy sector is heading as the industry transitions toward renewable energy — even though adoption has been slow.
So, when choosing oil stocks, stable cash flows, low operating costs, and diversification are critical to long-term success.
Not just an oil company
There is little doubt that Buffett continues to bet on Occidental because of the recent jumps in and future forecasts for the price of oil. However, he sees more to this stock than crude oil prices.
The company is more than a gas giant, it is also a leader in carbon capture and sequestration (CCS). This process captures carbon dioxide and stores it underground, and while good for the environment, it also provides a lucrative opportunity.
Occidental believes that CCS may become a $3 trillion to $5 trillion market, which, one day, could yield earnings and cash flow equal to its current oil and gas business.
Occidental is an expert in carbon dioxide
Occidental has a history of using a process known as enhanced oil recovery (EOR). The company increases oil production rates by injecting carbon dioxide into oil wells and has since become an EOR leader.
Occidental is already an expert in injecting and transporting carbon dioxide. So, the company wants to leverage its experience to capitalize on CCS. Oxy Low Carbon Ventures was formed as a result.
Occidental Petroleum’s CCS vision is intriguing for investors based on the sheer potential of this venture. The company has already secured significant partnerships to finance and deploy large-scale direct air capture (DAC) technology.
Occidental’s first DAC facility is being built in the Permian Basin. This facility could capture up to one million metric tons of atmospheric carbon dioxide in the future. Plus, it is just one of 70 the oil giant plans to build by 2035.
Another recent partnership with Western Midstream Partners (WES) aims to produce and deliver low-carbon intensity oil and gas products.
As Occidental works toward a potential net-zero output for its oil and gas production in the Delaware and DJ Basins, Western Midstream could transport carbon dioxide to Occidental’s facilities.
Together, these companies can lean on their extensive assets to meet the growing global energy demand while creating a leading carbon capture management system.
Occidental seeks and secures partnerships for every aspect of its upcoming CCS venture, including those who will provide underground pore space — like Weyerhaeuser (WY). This leading timberland company is leasing over 30,000 acres of pore space to Occidental. A similar deal was made with Manulife Investment Management, providing Occidental with an additional 27,000 acres.
Buffett is investing in now and the future
Many investors see Buffett’s recent buying behavior as a bet on oil prices, which it is — but there appears to be much more to the story. Occidental’s emerging CCS business will provide enormous upside potential. If the market unfolds as Occidental anticipates, Berkshire could see a significant return from its investment.
Today, Occidental seems to have its priorities in place. In early 2022, it planned to cut down debt, grow cash flow, and pay a rising dividend.
So far, so good.
In the company’s 2022 proxy statement, the company reported the repayment of around $6.7 billion in debt, and in Q2 2022, an additional $4.8 billion was repaid, representing 19% of the total outstanding principal. In the same quarter, cash flow from continuing operations hit an impressive $5.3 billion, compared to $3.3 billion in Q2 2021.
Is now the time to buy Occidental Petroleum stock?
The Organization of the Petroleum Exporting Countries (OPEC) believes demand will slow in 2023 compared to 2022. However, demand will still top pre-pandemic levels. And Occidental is more than a one-trick pony, placing massive bets on the CCS market.
Even if you’re not as bullish on Occidental as Buffett, this is a stock to keep high on your radar. By our estimates, there is still 37.5% upside in share price to $93.49 per share using a combination of valuation models, including discounted cash flows and EBIT multiples.
