Berkshire Hathaway Increases Its Ownership Stake in Occidental Petroleum
Warren Buffett’s Berkshire Hathaway has just recently increased its ownership stake in Occidental Petroleum. The investment company purchased nearly 3.7 million additional shares, costing around $216 million, bringing its stake to nearly 23.6%. This move comes after Berkshire Hathaway previously invested $10 billion in Occidental’s preferred stock with an 8% dividend, plus warrants to buy another $5 billion of common stock at $59.62 each.
Cowen has also upgraded Occidental Petroleum shares to Outperform from Market Perform with a $70 price target, citing the company’s resilient assets, productivity improvements, attractive reserve bookings, and favorable free cash yield.
Analysts also predict that the company’s exposure to higher crude oil pricing and its position in carbon capture and storage will benefit from funding catalysts that would inherently boost free cash flow profiles. The company is uniquely positioned to increase EOR related reserves from enhanced CO2 economics, and its differentiated catalyst-rich profile in a world of relative homogeneity across E&Ps makes it an attractive investment opportunity.
About Occidental Petroleum Corporation Stock $OXY :
Houston-based Occidental Petroleum Corporation explores and produces oil and gas. The business operates in three divisions: chemical, midstream and marketing, and oil and gas. It has operations in the US, Middle East, and Latin America. While the midstream and marketing segment manages the transportation and marketing of crude oil, natural gas, and petroleum products, the company’s chemical segment manufactures basic chemicals, vinyls, and performance chemicals. Occidental Petroleum is actively investing in carbon capture and storage technology because it is dedicated to sustainability and minimising its carbon footprint.
Valuation : Discounted Cash Flow
As seen above , we can clearly see Occidental Petroleum is undervalued and the risk-reward is highly favorable for the stock as it trades at $62.11 now. On a base case scenario $OXY trades at EV/Sales of 2.27 x which leads to the stock’s intrinsic value at around $86. We believe the stock to be bought at current levels and accumulated for a target price of 38% from spot of $62.11.
The capital stack of the business is also significantly cleaned up. Occidental Petroleum’s distinctive capital structure and the agreement it made with Berkshire Hathaway have several aspects that merit attention. The first is that the business has the option to buy 84 million shares for $5 billion, or just under $60 each, under certain conditions. Additionally, there is OXY.WS, the warrants that the company issued to shareholders and which have been profitable. In contrast to Berkshire Hathaway’s options, there won’t be much money coming into the company for these, and that will also dilute the shareholders by a factor of 1/8. If both the warrants and options are exercised, it is our expectation that Occidental Petroleum’s stake will increase from 23.1% to 26.1% in the company. Along with all of that, the business also has $10 billion in preferred equity that pays $800 million annually. It is easy to conclude that once the company’s annualised shareholder returns reach $4 per share, it must use half of its cash to buy back that equity at a 10% premium. It’s not the end of the world if it has to repurchase shares at an 8% yield.
Chart Overview : $OXY
The stock had peaked as high as $75 in November 2022 post which the stock has been just trading in ranges and forming lower high and lower lows. As seen in the chart above it has been in consolidation for suite some time and now the stock is ready for a upward journey looking at the donchain channel (50) and RSI (7). We believe the stock should quickly reach its first target of $69-$72 then march towards its final target of $82
Berkshire Hathaway’s increased stake in Occidental Petroleum and Cowen’s upgraded rating have generated interest in the company’s stock. Regarding the price of crude oil, Occidental Petroleum’s share price has fallen, and for good reason. However, Berkshire Hathaway, which is easily protected against long-term price variation, could benefit from lower share prices by making long-term investments. For the rest of the year, we do anticipate that the price of crude oil will fluctuate, possibly even falling due to fears of a correction. It is important to remember that demand is anticipated to remain strong, particularly as a result of China’s reopening. Because fewer projects would add to the supply, prices might stay lower for longer.Hence , we can conclude that Occidental Petroleum’s exposure to higher crude oil pricing and position in carbon capture and storage could result in increased free cash flow profiles, making it an attractive investment opportunity. We believe the stock should be bought at current levels and accumulated for a 2 year horizon & target price of 38% i.e. $86.