Here's Why Warren Buffett Is So Bullish on Occidental Petroleum?

Occidental Petroleum Corporation (OXY) in Houston, Tex., is an international energy company that is engaged primarily in the exploration and development of oil and gas. It is one of the largest oil producers in the United States, operating through three segments: Oil and Gas; Chemical; and Midstream and Marketing. The company has assets across the United States, the Middle East, and North Africa. OXY is also one of the leading oil producers in the Permian and DJ basins and the offshore Gulf of Mexico.

Legendary investor Warren Buffett has been investing in OXY stock lately through his firm Berkshire Hathaway (BRK.A). As of March 29, 2022, Buffett owned approximately 136.40 million shares of OXY, translating to a 14% stake in the company. Buffett owns roughly $7.70 billion worth of OXY shares. In fact, he bought more than 100 million OXY shares in March. Buffett initially invested in OXY in 2019, betting on its potential assets in the Permian Basin. He recently said in an interview that OXY CEO Vicki Hollub is "running the company the right way."

Shares of OXY have gained 117.1% in price over the past year and 75.4% year-to-date, thanks to the increasing focus on oil and gas stocks amid volatile crude oil prices.

Here is what could shape OXY's performance in the near term:

Debt Retirement

On March 9, OXY announced a cash tender offer to repurchase specific outstanding senior notes. The company repurchased approximately $2.82 billion of outstanding senior notes in two tranches. The tender was $308.16 million higher than its previous announcement.

These tender offers have significantly reduced OXY's outstanding debt, reducing its interest obligations. As a result, total shareholder returns should increase considerably in the near term. In fact, OXY increased its annual dividend by 1200% to $0.52 per share in February. Regarding this, OXY CEO and President Vicki Hollub said, "As we continue to reduce our net debt and strengthen our balance sheet, our focus has expanded to returning additional capital to shareholders, beginning with the increase in our quarterly common dividend to 13 cents per share."

Sustainability

On March 22, OXY partnered with SK Innovation Co. Ltd. to create net-zero oil from captured atmospheric carbon dioxide. Under the agreement, SK International might purchase up to 200,000 barrels of net-zero oil per year for five years from OXY and use them to develop related net-zero products such as lower-carbon aviation fuel.

Net-zero oil is compatible with existing refinery infrastructure, thereby limiting OXY's initial capital expenditures. OXY plans to inject approximately 100,000 tons of captured atmospheric CO2 volumes per year, which is equal to the expected CO2 emissions from the entire crude-oil lifecycle, including extraction, transportation, storage, shipping, refining, subsequent use, and combustion. This should help the company reduce its carbon footprint substantially over the long term.

Consensus Rating and Price Target

Among the 17 Wall Street analysts that rated OXY, nine rated it Buy, while seven rated it Hold, and one rated it Sell. The 12-month median price target of $69.75 indicates a 25.5% potential upside from yesterday's closing price of $55.59. The price targets range from a low of $50.00 to a high of $90.00.

POWR Ratings Reflect Rosy Prospects

OXY has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

OXY has an A grade for Momentum and Growth and a B for Quality. The stock is currently trading above its 50-day and 200-day moving averages of $53.79 and $36.30, respectively, indicating an uptrend in sync with its Momentum grade. In addition, the company's revenues and EBITDA have risen at CAGRs of 13.4% and 13%, respectively, over the past three years, justifying the Growth grade. Also, OXY's 62.79% trailing-12-month gross profit margin is 60.9% higher than the 39.02% industry average.

Among the 97 stocks in the B-rated Energy – Oil & Gas industry, OXY is ranked #32.

Beyond what I have stated above, view OXY ratings for Sentiment, Value, and Stability here.

Bottom Line

As one of the leading oil producers in the United States, OXY stands to benefit from the Biden administration's import embargo on Russian oil. As domestic oil demand surges, OXY's revenues and profit margins should improve in the coming quarters. Furthermore, as the company focuses on maintaining sustainable cash flows to maximize shareholder returns, OXY could be an ideal investment bet.

How Does Occidental Petroleum (OXY) Stack Up Against its Peers?

While OXY has a B rating in our proprietary rating system, one might want to consider looking at its industry peer, Unit Corp. (UNTC), which has an A (Strong Buy) rating.

OXY shares were trading at $55.25 per share on Thursday morning, down $0.34 (-0.61%). Year-to-date, OXY has gained 91.04%, versus a -11.16% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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