The Single Company Warren Buffett Seems To Think You Should Invest In
Written by
John Csiszar
Edited by
Gary Dudak
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For all the sage advice that Warren Buffett freely dispenses, it seems as if his personal investment philosophy violates the basic strategy that most financial advisors offer their clients, which is to have a diversified portfolio. More than 80% of the $360 billion-strong Berkshire Hathaway investment portfolio, for example, is invested in just seven stocks.
While Apple gets the bulk of the headlines in the financial press because it comprises a whopping 42.5% of Berkshire’s entire portfolio, it’s not the stock that Buffett has been buying most aggressively lately. That honor falls to Occidental Petroleum. So, what exactly does Buffett see in OXY, and is it an appropriate investment for your portfolio? Read on to learn more.
Why Is Buffett Buying Occidental Petroleum?
Although Buffett’s total investment in Occidental Petroleum is “only” 4.2% of Berkshire’s investment portfolio, it amounts to 28.2% of OXY’s entire share count. In other words, Berkshire Hathaway alone owns more than a quarter of the entire company.
Buffett has said that he became interested in OXY once he read the firm’s annual report, at which point he gained confidence in the company’s growth and its leadership. Buffett has since gone on to tell shareholders in Feb. 2024 that he expects Berkshire to hold OXY “indefinitely.” That’s quite a vote of confidence from one of the world’s most legendary investors.
How Has the Stock Performed?
When Buffett made his first block purchases of OXY in 2022, his weighted average cost was about $53, according to SEC filings. Berkshire has made numerous purchases since the original flurry of $10 billion in 2022, but those shares bought at an average price of about $53 are up roughly 15%, given OXY’s closing price of $61.09 on Mar. 6, 2024.
It’s important to note, however, that as Buffett often says, his favorite holding period is “forever.” Thus, the famed investor isn’t too concerned about how Occidental performs over the short time. In fact, he might even prefer that it occasionally falls in value so that he can pick up additional shares at cheaper levels.
On a year-to-date basis, shares of OXY haven’t moved all that much, up just 1.73% as of Mar. 6. On a one-year and five-year basis, shares are actually down 1.71% and 4.37%, respectively. Perhaps this is one of the reasons that Buffett views the shares as a bargain.
What Do Analysts Think of OXY?
The 21 analysts offering recommendations for Occidental Petroleum have a consensus “buy” rating on the stock, with an average 12-month price target of $67.40. At its Mar. 6 close of $61.09, that suggests a potential one-year gain of about 10%.
Here are some of the reasons why analysts are bullish.
Free Cash Flow
In its most recent quarterly report, Occidental posted $3.1 billion in operating cash flow and $1.7 billion in free cash flow. That money was used for everything from repurchases of common and preferred stock to capital expenses and debt reduction. These are all factors that should enhance the earnings and growth of the stock going forward, particularly if it can continue those types of free cash levels.
CrownRock Acquisition
Occidental’s announcement that it was going to purchase CrownRock in Dec. 2023 was huge news, and the terms of the deal were enough to encourage Buffett to purchase an additional $588 million OXY shares. Analysts think the deal could generate as much as $1 billion in additional free cash flow after the deal is done.
Carbon Management
One of the growth catalysts for Occidental Petroleum moving forward could be its shift into an entirely new business. Fossil fuel companies like OXY often trade at lower price multiples because investors are leery of “dirty” companies that may have a declining future in the wake of rising environmentalism.
But OXY’s investments into carbon management may enhance its reputation. Carbon capture, as the name implies, seeks to capture the carbon wastes produced by oil and gas manufacturing, preventing it from entering the atmosphere. Currently, the costs of doing this are high, but with time and investment, this could prove to be a huge boon to the company’s business in the future.
Should You Add OXY to Your Portfolio?
Occidental Petroleum may be a good long-term investment, but it depends on the type of investor that you are. While Buffett and Berkshire Hathaway have sunk billions of dollars into the company, they are playing the long game. In other words, if you’re trying to invest like Buffett, you might have to be willing to wait years before you earn a significant return on your investment. Just ask the investors who bought into the company five years ago and are still waiting just to break even.
However, if you’re a believer that oil and gas companies are decades away from being replaced by “clean energy” ones, that carbon management will turn into a big business for OXY, and/or that its free cash flow will allow it to make strategic moves that it can leverage into greater profitability, Occidental Petroleum might deserve a space in your portfolio.
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