Warren Buffett has a seemingly insatiable appetite for shares in Occidental Petroleum (OXY (opens in new tab), $62.11), but that doesn’t mean retail investors should gorge on OXY stock as well.
Berkshire Hathaway (BRK.B (opens in new tab), $269.58), of which Buffett serves as chairman and CEO, purchased another 6 million shares in the Houston-based integrated oil and gas firm between Sept. 26 and Sept. 28, according to a regulatory filing. At a cost of about $352 million, the additional shares increased Berkshire Hathaway’s ownership to 21% of OXY’s shares outstanding.
Buffett, who last bought OXY stock seven weeks ago, pounced after Occidental Petroleum shares lost more than a fifth of their value over the preceding month.
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BRK.B additionally owns $10 billion worth of 8% preferred shares, as well as 84 million warrants to purchase OXY stock. Occidental shares must trade above the warrants’ exercise price of $59.62 for the warrants to be in the money.
If warrants are included, all in, Berkshire owns nearly 30% of Occidental Petroleum. In August, BRK.B received regulatory approval to acquire up to 50% of the company.
An OXY Acquisition Would Break Buffett’s Record Analysts, traders and other interested parties can’t help but speculate that Buffett is eyeing a buyout of OXY. Truist Securities analyst Neal Dingmann, for one, believes Buffett could acquire the energy giant outright after OXY receives upgrades to its credit ratings.
Not only would OXY fit well with the extant energy assets in the Berkshire Hathaway portfolio (opens in new tab), the analyst has noted, but credit upgrades would lower Occidental Petroleum’s cost of capital, allowing it to return more cash to shareholders through stock buybacks and dividends.
Don’t forget: Buffett adores buybacks and dividends – as long as they’re not courtesy of Berkshire Hathaway. (Berkshire is highly disciplined when it comes to share repurchases and famously does not pay a dividend.)
If Berkshire Hathaway were indeed to acquire Occidental Petroleum, it would be Buffett’s largest-ever deal by a wide margin. OXY’s enterprise value, or its theoretical takeout price that accounts for both cash and debt, stands at $87.8 billion. Based on that figure, the 70% of OXY that Berkshire doesn’t already own or have claim to via warrants would be worth $62 billion.
That’s a very large acquisition by any measure, even before adding in any kind of premium. Such a deal would easily surpass the $44 billion in cash and debt-assumption Buffett paid for railroad operator BNSF in 2009.
OXY stock has more than doubled in 2022 – vs. a decline of more than 20% for the S&P 500 – thanks in no small part to Buffett’s interest. True, higher year-over-year prices for crude oil and natural gas have made energy stocks (opens in new tab) rare winners this year, but the S&P 500’s energy sector is up “only” 32% in 2022.
It seems safe to assume that a good portion of OXY’s outperformance relative to its sector (and the fact that it’s the best performing stock in the S&P 500 this year) can be attributed to others following Buffett’s lead. (Rising short interest and short sellers being squeezed out of their positions might also be burnishing some of OXY’s returns.)
But that doesn’t mean retail investors should pile into OXY like Uncle Warren is.
Wall Street Says OXY Stock is a HoldFor one thing, as noted above, OXY already has more than doubled in the past nine months. The idea is to buy low, remember?
Indeed, per regulatory filings, Buffett likes to go shopping for OXY when it’s in the $50s and low $60s. Yet OXY’s average closing price over the past three months comes to more than $64 – and that’s after its recent swoon.
It’s also the case that analysts, as a group, aren’t particularly enthusiastic about OXY at current levels, giving it a consensus recommendation of Hold, per S&P Global Market Intelligence. Of the 26 analysts issuing opinions on the stock, five rate it at Strong Buy, three say Buy, 15 have it at Hold, two call it a Sell and one says Strong Sell.
Among other issues, analysts in the Hold and Sell camps worry about the way rising fears of global recession (opens in new tab) are punishing energy prices.
Which brings us to a related concern: Employing OXY as a sort of call option on oil is in some sense “fighting the Fed.”
After all, Buffett is supposedly attracted to OXY, at least in part, because oil is a hedge against inflation (opens in new tab). But hawkish central banks are moving aggressively to halt the march of fast-rising prices, risking recession – and demand for oil – in the process.
For those reasons and more, BofA Securities is skeptical of Buffett’s big bet on oil by way of Occidental Petroleum (if that is indeed what the Oracle of Omaha is up to).
Analysts Say Investors Have Better Options Than OXY”If OXY is a bullish oil view, there are better options given the stock’s limited upside,” writes analyst John Abbott, who rates shares at Neutral (the equivalent of Hold). “Recent outperformance may mean the risk from here is that BRK ends up bidding against itself.”
Investors would also do well to remember that when it comes to making macro calls on energy, Buffett has been badly wrong before, the analyst notes. Berkshire made a large and ill-timed investment in ConocoPhillips (COP (opens in new tab)) in 2007, Abbott reminds his clients. Buffett later apologized for the move, which he pulled right before oil prices peaked.
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Ultimately, the analyst’s bottom line is pretty simple: OXY has outperformed to the point where oil-price bulls can find better value in select energy peers, such as ExxonMobil (XOM (opens in new tab)), the aforementioned COP and Hess (HES (opens in new tab)), among others.
True, OXY still looks compellingly valued on a fundamental basis. The stock trades at just 7.3 times analysts’ 2023 earnings per share (EPS) estimate. That’s well below the stock’s own five-year average of 23 times projected EPS, according to data from Refinitiv Stock Reports Plus. That’s also an attractive multiple to pay for a company expected to generate average annual EPS growth of 9% over the next three to five years, per S&P Global Market Intelligence.
And yet with the future course of energy prices (opens in new tab) now very much in doubt – and Buffett himself unwilling to pay more than something in the low $60s for OXY stock – all those analysts sitting on the sidelines make some unsettling points.
Don’t Count on a Buffett Buyout of OccidentalFor example, Berkshire has never landed a whale anywhere near as big as the Occidental Petroleum buyout would be. So don’t be so quick to assume that total control is Buffett’s end game.
It’s also not necessarily good news that OXY stock still looks so cheap after its torrid 2022 run. As the saying goes, sometimes a cheap stock (opens in new tab) is cheap for a reason.
Finally, and most importantly for retail investors, it’s worth wondering how much upside could possibly be left in a name that’s up 115% for the year-to-date in a bear market.