Matt DiLallo, The Motley Fool
5 min read
In This Article:
-
Berkshire Hathaway's cost basis on its Occidental position is above $50 a share.
-
The oil company expects to deliver roughly $1.5 billion of incremental annual free cash flow by 2027, unrelated to oil prices.
-
It has additional upside catalysts from rising oil prices and its carbon capture and storage business.
Shares of Occidental Petroleum (NYSE: OXY) have dipped over the past year. They've fallen from a peak of more than $60 a share to less than $50. That's largely due to a decline in oil prices, which have fallen from over $80 a barrel to their recent level just above $70 per barrel.
Here's a look at several reasons why you should buy the oil stock while it's below $50 a barrel.
Warren Buffett's Berkshire Hathaway has been snapping up shares of Occidental in recent years. Buffett's company owns over 264.9 million shares (26.9% of Occidental's outstanding shares). Those shares are currently worth more than $12.6 billion. That's 4.4% of Berkshire's investment portfolio, making Occidental its sixth-largest position.
Berkshire's cost basis on its Occidental position is in the low $50s. Buffett's company has capitalized on opportunities to add to its position when the oil stock has dipped below $50 a share over the past year.
In addition to buying shares on the open market, Buffett's company holds warrants to buy another $5 billion of Occidental's stock at $59.62 apiece. His company received those warrants when it made its $10 billion preferred stock investment in Occidental in 2019 to support its purchase of Anadarko Petroleum.
Oil prices have a major impact on Occidental Petroleum's cash flow and stock price because its oil and gas business is its biggest moneymaker. While its fossil fuel business will continue to be its main profit driver, the company expects to capture a roughly $1.5 billion improvement in its free cash flow over the next few years, unrelated to oil prices.
Occidental Petroleum expects to reach an inflection point next year that will boost its free cash flow by $1 billion in 2026. It anticipates its chemical business (OxyChem) will deliver more than $450 million of incremental free cash flow in 2026 from the benefits of expansion projects, including its Battleground plant and the roll-off of the associated capital spending. Meanwhile, the company expects to capture about $450 million in additional earnings in its midstream business as legacy contracts roll off and it reduces capital spending in that segment. Finally, Occidental anticipates its debt repayment strategy will deliver over $135 million in annual interest expense savings in 2026. The company sees the total free-cash-flow improvement from these catalysts rising to around $1.5 billion in 2027.
