Warren Buffett‘s Berkshire Hathaway Inc. BRK BRK has significantly increased its stake in Occidental Petroleum Corp. OXY through five purchases last week, seemingly diverging from the legendary investor’s long-held investment principles regarding declining stocks.
What Happened: Regulatory filings show Berkshire acquired approximately 8.9 million shares of Occidental between Dec. 17 and Dec. 19, investing about $405 million at an average price of $46 per share. The purchases have increased Berkshire’s ownership to 264.2 million shares, representing a 28% stake worth approximately $12 billion.
The move appears to contrast with Buffett’s own investment philosophy, outlined in his 1988 letter to Berkshire shareholders.
Quoting then-Fidelity Magellan fund manager Peter Lynch, Buffett wrote, “We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint.” He likened such behavior to “cutting the flowers and watering the weeds.”
Buffett’s recent decision to reduce his stake in Apple Inc. AAPL has sparked speculation, with Berkshire Hathaway gaining $97 billion in cash, raising its cash reserves to a record $325 billion.
While some analysts suggest the sale was driven by Apple’s high price-to-earnings ratio, others believe Buffett may be preparing for a leadership transition or anticipating a crisis.
The recent purchases are notable as they were made at prices significantly below Berkshire’s previous average cost basis of $54.20 per share. Occidental’s stock has declined 20.33% this year, with shares trading consistently below $50 in recent weeks.
The increased investment comes amid challenging market conditions for energy companies. The International Energy Agency recently reduced its forecast for oil demand growth through 2024 and 2025, citing weakening demand from China and increasing supplies from the Americas.
Crude Oil WTI prices have declined approximately 35.36% since its peak of $112 in June 2022 in the last 5 years.
Why It Matters: Occidental’s financial performance reflects these industry headwinds. The company’s free cash flow has decreased significantly in recent quarters, dropping to $275 million in the first quarter of 2024 and $548 million in the second quarter, marking the lowest levels since early 2021. However, it rebounded strongly in the third quarter, surging to over $2 billion.
The company’s next earnings announcement is scheduled for Feb. 20.
The oil producer currently maintains a dividend yield of 1.84%, notably lower than its historical range of 3.5% to 5% over the past decade. According to company investor presentations, maintaining a sustainable and growing dividend remains a key priority for Occidental’s management.
Berkshire’s continued investment in Occidental represents one of Buffett’s largest recent positions, even as the company faces industry-wide challenges and stock price pressure.
The trades have sparked a modest market reaction, with Occidental shares rising from $45.30 to $47.90 following the disclosure of Berkshire’s purchases, according to data from Benzinga Pro.
Wall Street analysts remain optimistic about Occidental, with a consensus price target of $62.86 from 23 analysts. Raymond James set the highest target at $78, while Piper Sandler’s lowest is $51. Recent ratings from Piper Sandler, Mizuho, and UBS average $57.33, indicating a potential 19.52% upside.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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