So far this year, Warren Buffett has made massive energy bets, including his continued investment in Occidental Petroleum (OXY). The billionaire’s relationship with this once-troubled energy company began in 2019 and now looks like a long-term play.
What was once an opportunistic buy has turned into a significant partnership. Buffett has received permission from the Federal Energy Regulatory Commission (FERC) to acquire up to 50% of the company’s shares. So, what’s next for this stock, and why should you consider investing?
Why Invest in Occidental Petroleum?
Occidental Petroleum’s core focus is the exploration and extraction of oil and gas. The company then sells the oil and gas it extracts, making it one of the largest upstream oil companies with significant acreage in the Permian Basin and the Rockies.
Although renewable energy will play a critical role in the coming years, investors shouldn’t count out fossil fuels. In 2020, just 6% of total energy production came from energy sources like wind and solar. While renewable energy production will likely rise in the near future, the need for fossil fuels is still strong. The demand for oil and gas is expected to peak in the next 20 years. However, it will remain a crucial source of power for decades.
Then there’s Occidental Petroleum’s dividend. Before oil prices skyrocketed in March, Occidental Petroleum was focused on slashing debt, growing cash flows, and a sustainable dividend. In 2021, the company generated record cash flow, allowing it to pay off $6.7 billion in debt. In February 2022, Occidental Petroleum’s dividend increased by an impressive 1200%.
Buffett Is a Major Fan of Occidental
Buffett has been investing aggressively in Occidental and holds over 188 million shares as of this writing. His stake in the company is up to 20%, but he’s eyeing 50%. So far, his heavy investment has paid off — the stock has risen over 150% this past year.
Buffett remains bullish about what’s to come for oil and gas and is particularly fond of Occidental’s willingness to reward its shareholders. His recent moves into the oil and gas industry surprised some since the Oracle of Omaha isn’t a big fan of cyclical stocks. However, a closer look reveals why Buffett is buying shares hand over fist.
Looking at Occidental’s Numbers
In Q1 2022, Occidental’s free cash flow more than doubled year over year, hitting a record high of $3.3 billion. The company used that cash flow to pay off debt, representing 12% of its total outstanding principal. On August 2, 2022, Occidental announced its second-quarter results, including more repaid debt and impressive cash flows. Occidental paid 19% of its total outstanding debt, or nearly $4.8 billion.
A record quarterly free cash flow before working capital of $4.2 billion was reported. The company also repurposed over 18 million shares for approximately $1.1 billion. The goal is to make the company’s dividends more sustainable, which is attainable at this rate.
Earlier this year, Occidental increased its annual dividend to $0.52 per share compared to the $0.04 per share it paid in 2021. Many agree Occidental’s dividend could increase further with time. Again, this is something that Buffett is drawn to. Berkshire Hathaway’s portfolio is stacked with steady dividend stocks.
Innovation Within the Oil and Gas Industry
As environmental issues become more pressing, energy companies continue to leverage more sustainable methods and technologies. Occidental is no exception. The company is getting into carbon capture technology, trapping carbon dioxide at the source to store it underground.
The company has set its sights on the Inflation Reduction Act, which includes tax credits for carbon capture projects. These tax breaks could help fuel a new business segment.
Carbon capture technology’s role is still unknown, as Occidental’s facilities won’t be operational until 2024. However, moving into this space could help reduce financial risks and benefit long-term investors.
Is Now the Time To Buy Shares of OXY?
Oil stocks have been red hot in 2022, so is it too late to buy shares of OXY? Rising share prices have settled, increasing by less than 4% this past month. So, can the company support a long-term rally?
We can’t forget that energy stocks are cyclical — oil and gas prices can vary wildly. For example, in 2020, Occidental lost $13.5 billion in response to the COVID pandemic.
For now, it seems like the boom times are back and analysts expect Occidental to bring in $32.8 billion of revenue. Combined eye-popping top line figures with an improving balance sheet, strong cash flows, and diminishing debt, and Occidental looks like a solid stock to own, even after its successful start to the year.
At this point, it’s tough to argue with Buffett, and based on his recent moves, Occidental’s journey will be exciting to watch.