Warren Buffett is arguably the most popular investor in the world. Also known as the Oracle of Omaha, Buffett has beaten the broader markets by a wide margin for roughly seven decades. Wall Street closely watches the investments made by Buffett as the billionaire has successfully generated significant gains over time.
Now, Buffett is the chairman of Berkshire Hathaway, a conglomerate that holds several investments in publicly listed companies. According to recent SEC filings, Berkshire reduced its stake in Apple and Bank of America in the second quarter (Q2) of 2024, increasing its cash pile to US$277 billion. Apple and Bank of America were Berkshire’s two largest holdings and the move has surprised investors.
It’s possible that Buffett was worried about the possibility of an upcoming recession and would have liked to have significant balance sheet cash to buy quality companies at a discount when markets pull back. For example, the unemployment rate in the U.S. has increased to 4.3% as companies continue to wrestle with headwinds such as geopolitical tensions, inflation, high interest rates, and volatile commodity prices.
Alternatively, Berkshire has significantly increased its position in Occidental Petroleum (NYSE: OXY) in the last three years. In Q1 of 2024, Berkshire purchased three million shares of Occidental raising its stake in the company to almost 29%. Today, Occidental is a core position of Warren Buffett’s equity portfolio. Let’s see why.
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An overview of Occidental Petroleum
Valued at US$51.4 billion by market cap, Occidental Petroleum is engaged in the acquisition, exploration, and development of oil and gas properties in the U.S., the Middle East, and Africa. It has three business segments that include:
- Oil and Gas: The business explores for, develops, and produces oil and condensate, natural gas liquids, and natural gas.
- Chemicals: The segment manufactures and markets basic chemicals and vinyls.
- Midstream and Marketing: It gathers, processes, transports, stores, and markets oil condensates, natural gas liquids, natural gas, carbon dioxide, and power.
Occidental Petroleum is well-diversified
Occidental Petroleum has a robust stream of cash-generating assets, allowing it to pay shareholders an annual dividend of US$0.88 per share, indicating a yield of 1.6%. Due to its sizeable investment in Occidental stock, Berkshire Hathaway earns close to US$225 million annually via dividends.
Strong performance across business segments allowed Occidental Petroleum to report a free cash flow of over US$700 million in Q1 of 2024. Comparatively, it paid shareholders a quarterly dividend of US$332 million, indicating a payout ratio of less than 50%.
The company’s free cash flow in 2023 stood at US$5.5 billion, easily covering its dividend payout of US$1.3 billion. A low payout ratio allows Occidental Petroleum to target accretive acquisitions, lower balance sheet debt, and raise dividends further.
Last December, Occidental Petroleum disclosed plans to acquire CrownRock for US$12 billion. It ended Q1 with US$1.85 billion in cash and US$18.39 billion in long-term debt, which might make investors nervous, especially if the company takes on additional debt to fund the acquisition. However, Occidental explained it would sell off non-core assets to partially repay the debt tied to the CrownRock acquisition.
Priced at 15.6 times forward earnings, OXY stock is quite cheap and trades at a discount of 30% to consensus price target estimates.
