In the previous quarter, renowned investor Warren Buffet merely augmented a single pre-existing portfolio investment. However, in June, Buffet invested an additional $435 million in the same asset.
Diving into the moves of the big players on Wall Street can provide valuable insights for investors. Following the end of each quarter, influential institutions like hedge funds and wealth management firms are required to report their activity through a form called a 13F. This information offers a glimpse into the significant flow of capital, giving a hint at where the smart money is heading.
Last quarter, iconic investor Warren Buffett's Berkshire Hathaway decided to bolster one of its existing portfolio positions: Occidental Petroleum (OXY). With a new filings showing Buffett's recent purchase, the Oracle of Omaha has invested another $435 million in OXY shares between June 13 and 17.
But just why is Buffett doubling down on OXY? Let's delve into the factors that make this energy giant an attractive prospect for investors.
Comprehending the dynamics of commodities
Occidental Petroleum specializes in the exploration and development of oil and natural gas. While the average spot price for crude oil has dipped since hitting its peak a couple of years back, it still remains considerably higher than pre-pandemic levels, averaging around $81 as of now.
It's important to remember that oil and gas are commodities – just like a company's stock price, commodity prices can be volatile, influenced by various factors including:
- Congressional policies: Changes in legislation can drastically impact commodity prices.
- Global developments: Events in other parts of the world, like conflicts in Eastern Europe, can also cause fluctuations.
In the chart, you'll notice not only the volatility in crude oil prices but also the correlation between gas prices in the US. As the average oil price normalized, so did the price at the pump. At an average cost of $3.56, gas prices are still substantially higher than in the past.
Why Occidental Petroleum could be a promising play
Although higher energy prices can take a toll on consumers, companies like Occidental Petroleum are thriving off of them. The volatility of commodity prices persists, but for the time being, higher prices have served as a catalyst for OXY.
There are additional reasons why Buffett might hold a high regard for Occidental:
- Focus on carbon management: As governments and businesses worldwide are becoming increasingly invested in green energy policies, it's reassuring to see Occidental's management directing profits toward initiatives in renewable energy. Occidental Petroleum shared in their first-quarter earnings report that their Low Carbon Ventures business is expected to produce cash flow that's detached from oil and gas price volatility, further strengthening the company's financial stability.
- Buffett's golden rule: One of Buffett's core investing principles is to invest in businesses that generate steady cash flow. Although Occidental Petroleum may experience revenue and profit fluctuations from time to time, the company's core strength and potential growth in sustainable energy makes for a convincing long-term thesis.
Is Occidental Petroleum stock worth investing in right now?
Halfway through 2023, both the S&P 500 and Nasdaq Composite have gained impressive returns, surpassing 14% and 18% respectively. Exceeding these figures, the energy sector has gained nearly 7%. Despite these impressive market performances, OXY's stock growth of 5% lags behind.
My gut feeling is that investors are simply looking elsewhere for growth. After all, the tech sector is having a noteworthy moment, and some may choose to avoid volatile opportunities in the oil and gas market given the ongoing macroeconomic challenges.
However, present conditions in the oil and gas market are actually playing a role in Occidental's growth. Furthermore, long-term investors understand that basing investment decisions solely on current market trends can be shortsighted.
Perhaps Occidental Petroleum might be a worthwhile investment option right now. I suspect that the oil and gas industry will remain a major contributor to the company's growth in the long run. Even if commodity prices begin to normalize, Occidental Petroleum's initiatives in sustainable energy should provide a new source of growth, dampening some of the volatility in the company's legacy operations.
After analyzing Warren Buffett's recent investment in Occidental Petroleum, one may consider following his lead and investing in the company as well. Buffett's decision to invest $435 million in OXY shares demonstrates his confidence in the company's potential growth, considering the factors influencing commodity prices such as Congressional policies and global developments.
The company's focus on carbon management and investment in renewable energy ventures, as highlighted in their first-quarter earnings report, further strengthens its financial stability and long-term growth prospects. Despite current market trends and the volatility of the oil and gas market, the potential growth in sustainable energy could offset some of the industry's volatility, making Occidental Petroleum an attractive investment opportunity.
