Lately, there aren’t a lot of stocks Warren Buffett has found interesting enough to add to Berkshire Hathaway‘s (NYSE: BRK.A) (NYSE: BRK.B) $385 billion portfolio. Buffett, through Berkshire, has made only a handful of purchases during the current bull market.
Truth be told, Buffett has sold more stocks than he’s bought in each of the last six quarters. Some of his biggest sales last quarter included a portion of his top holding, Apple, as well as all of Berkshire’s position in Paramount Global stock and the rest of Berkshire’s stake in HP. But he’s been consistently adding to some positions in 2024, including one of his biggest holdings.
So far in June, Buffett spent another $435 million on Occidental Petroleum (NYSE: OXY) to make it Berkshire’s sixth-largest position.
More recent Securities and Exchange Commission filings reveal purchases of Occidental Petroleum between June 5 and June 17. Buffett has been snapping up shares of Occidental when it trades around $60 per share, and investors may want to follow his lead.
A stock Buffett plans to hold forever
Buffett originally invested in Occidental in 2019, when he purchased $10 billion of preferred shares directly from the company for Berkshire Hathaway. That $10 billion investment helped finance Occidental’s acquisition of Anadarko, strengthening its position in the Permian Basin.
While that acquisition left Occidental laden with debt just ahead of a tough period for the energy market that nobody could have predicted (the COVID-19 pandemic), management admirably navigated through the challenging environment. It suspended its dividend and strategically sold off assets to deleverage its balance sheet, and it’s once again on solid footing.
Buffett has since added to his position in Occidental. With the most recent $435 million purchase, Berkshire Hathaway now owns about 28.8% of shares outstanding — a stake worth about $15.9 billion. It also still owns about $8.5 billion of preferred shares, which include warrants to buy more of the company’s common stock at $59.62 a share (it currently trades around $62.90).
In his most recent letter to Berkshire shareholders, Buffett praised Occidental CEO Vicki Hollub, saying the energy stock is a holding he plans to maintain indefinitely. “Under Vicki Hollub’s leadership, Occidental is doing the right things for both its country and its owners,” Buffett wrote. “We particularly like its vast oil and gas holdings in the United States, as well as its leadership in carbon-capture initiatives.”
Occidental will add to its leading position in the Permian Basin this year with its $12 billion acquisition of CrownRock, which is set to close in the third quarter. Hollub will likely follow the same playbook as with the much larger Anadarko acquisition, selling off non-essential assets to reduce the amount of debt on Occidental’s balance sheet. It’s already exploring a sale of Permian assets worth over $1 billion, according to a report from Reuters in May.
A big bet on oil prices
While Occidental is an integrated energy company, the bulk of its revenue and income comes from drilling. It’s in the business of acquiring land and separating oil from rock. That means that its profits depend heavily on the price of oil.
When it announced the CrownRock acquisition at the end of last year, it estimated it could generate an additional $1 billion in annual free cash flow assuming oil prices remain above $70 per barrel.
Hollub now expects oil prices to remain in the $80 to $85 range through 2025. Oil prices took a hit after the members of OPEC+ agreed earlier this month to a plan that would extend their production cuts into 2025, but that would also allow eight member nations to start easing back from their voluntary cuts beginning in October. However, crude prices quickly recovered to around $80.
Buffett took the opportunity to buy Occidental when oil prices came down, and he has already benefited from the slight recovery. Even if oil prices remain relatively stable, Occidental is well-positioned to generate significant cash flow for its shareholders.
Should investors follow Buffett’s lead?
As mentioned, Buffett is buying Occidental shares practically any time they dip below $60. At that price, the stock trades at around 14 times forward earnings. That puts it firmly in the value stock territory, but it’s not as attractive a valuation as some other oil producers and integrated energy companies carry.
But Occidental, under Hollub, is far more aggressive at growing its bottom line via acquisition and cost-cutting. That could result in far better profit growth over the long run, especially if oil prices consistently move higher. Her strategy brings with it considerable risk, but it also comes with much more potential growth in the long run. In the meantime, the company is certainly stable enough, generating plenty of cash to continue growing its operations while paying a nice dividend.
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Adam Levy has positions in Apple. The Motley Fool has positions in and recommends Apple, Berkshire Hathaway, and HP. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Warren Buffett Just Bought $435 Million of This Stock and Plans to Hold It Forever was originally published by The Motley Fool
