Warren Buffett has added another 5.99 million shares of Occidental Petroleum to his portfolio, according to a Sept. 28 SEC filing. Buffett has been on an OXY stock buying spree of late, with the billionaire's Berkshire Hathaway adding more than 20 million additional shares of OXY stock to its portfolio since July.
Berkshire Hathaway has increased its OXY stake to around 27%, up from 20.2%, according to SEC filings. This comes after the Federal Energy Regulatory Commission granted Buffett's company approval on Aug. 19 to purchase up to 50% of available OXY stock.
Obviously Buffett is high on the oil giant. However, with the market in correction, should you believe the hype?
With oil and gas stocks consistently outperforming the market in 2022, Occidental Petroleum shares have soared around 100% since the start of 2022, one of the top performers in the S&P 500. The Houston-based company has benefited from increased fuel prices, brought on by inflation and Russia's invasion of Ukraine in February.
For much of the first half of 2022, U.S. crude oil prices have been rising, peaking around $130 per barrel in early March. However, prices have retreated, and broke below technical support at $94 per barrel at the start of August. On Sept. 29, U.S. crude was around $82 per barrel.
Meanwhile, U.S. natural gas prices have been on an upward trend in 2022. Prices have hit 14-year highs but have now dipped to around $7 per million British thermal units.
OXY Stock Fundamentals
Occidental Petroleum's business exposure is primarily in oil, natural gas liquids and natural gas. However it also has a petrochemicals segment which has performed well in recent quarters.
OXY beat earnings estimates with record profits in the second quarter on Aug. 2. The company reported earning of $3.16 per share, a 888% year-over-year increase. Revenue increased 81% to $10.7 billion.
This comes after sales jumped 56% to just over $8.5 billion in the first quarter, a slight slowdown from triple-digit year-over-year growth in the prior three quarters. Earnings soared to $2.12 per share, up from a 15-cent loss in the year-earlier period. Broken down by segment, oil and gas revenue jumped 66% to just over $6 billion. Chemical revenue increased 55% to $1.68 billion.
OXY will report third quarter earnings in November. Wall Street predicts earnings per share of $2.68, a 208% gain, and $9.62 billion in revenue, a 41% increase, according to FactSet.
Analysts are forecasting fiscal year EPS to balloon 318% to $10.65. Sales are expected to jump 45% to $37.7 billion for fiscal year 2022.
While Occidental reported strong profits in Q2, it was driven primarily by increased oil prices, as the company's oil production volumes remained in line with guidance.
In May 10 SEC filings, Occidental reported that its 2022 priorities are to "maximize cash flow by sustaining 2021 production levels."
OXY's Capital Spending
While many oil and gas producers are seeing strong profits in 2022, inflation and supply-chain snags have resulted in increased capital spending that is producing little to no increase in production.
Data from the U.S. Energy Information Administration shows oil and gas companies downshifted both spending and production for the second quarter.
An EIA scan of 53 public U.S. oil and gas companies showed that combined cash flows increased 86% to $25.7 billion during the first quarter. Meanwhile, capital spending nearly doubled vs. 2021. These same companies reported a 5% decline in capital expenditures in the second quarter vs. Q1 this year.
The EIA found that while the price of crude oil has increased, supply-chain issues and production expenses continue to pressure the energy sector. Costs of supplies and labor have more than doubled from the pre-pandemic average, according to the EIA.
Initially around $250 million of OXY's 2022 capital spending budget was to cover inflation related costs. However, the company's current assessment is that it will actually be $350 million-$450 million.
Occidental's full-year capital budget of $3.9 billion-$4.3 billion has remained unchanged. However, company executives told investors they expect spending to come in near the high end of that range.
Occidental has reported price inflation in pipeline and tubular goods critical oil and gas infrastructure. The price of sand, used in oil and natural gas fracking, has also increased in price, according to OXY.
OXY executives told investors during the Q2 earnings call that supplies and prices have been secured for the second half of 2022.
The Risk In The OXY Stock Buffett Effect
Berkshire Hathaway has raised its OXY stake to nearly 27%, according to federal filings. In August, the Federal Energy Regulatory Commission granted Buffett permission to purchase 50% of OXY.
Before the regulatory approval, Berkshire Hathaway had paid around $390 million for nearly 7 million addition shares between Aug. 4-8, bringing its stake in the company to more than 20%. BRKA had added millions of shares to its portfolio in July. Berkshire Hathaway added 1.94 million shares from July 14-18 alone, federal filings show.
Like many oil and gas producers in 2022, Occidental has showed booming revenue growth in recent quarters and while on the face of it Buffett's interest in OXY appears to be a positive, Occidental Petroleum's price and valuation could be exaggerated by the billionaire's buying spree, especially in the current environment.
Buffett has appeared to be buying OXY as the stock pulled back to $57-$61.5 per share, according to Sept. 28 SEC filings. For more information on Buffett's portfolio, here is an in-depth look at other stocks Buffett invests in.
A recent Goldman Sachs note said that OXY's exposure to the volatility of commodity prices is a risk for the company. Views at JPMorgan on Occidental were similar.
JP Morgan analyst John Royall wrote the primary downside risks include decreasing oil prices and the company's higher-than-expected capital spending.
OXY also wrote in a May 10 federal filing that its financial condition was highly dependent on oil and natural gas prices.
"It is expected that the price of oil will be volatile for the foreseeable future given the current geopolitical risks and the effects on oil demand resulting from COVID-19-related travel restrictions and stay-at-home orders in certain international countries," Occidental Petroleum reported.
Carbon Capture: Risk OR Potential For OXY Stock?
Both Goldman Sachs and JP Morgan include Occidental's recent emphasis on carbon capture projects as an intriguing growth opportunity. However, the analysts seem unsure whether or not it is a financial risk that OXY is focusing on reducing emissions.
Carbon capture, an old energy industry technique to help amplify oil production, has begun to be viewed as a way for oil producing companies to reach their net zero emissions targets.
Carbon capture, utilization and storage (CCUS) projects have now been announced by many energy sector giants. Occidental has been an early adopter investing in a technique known as direct air capture (DAC).
This differs from the more established point-source capture in which carbon-scrubbing equipment is attached directly to flue stacks in factories, power generation stations or other industrial carbon sources.
Direct air capture scrubs the target gases directly out of the atmosphere, without attaching to the source of emissions. This provides broader flexibility in siting facilities, allowing the scrubbing technology to sit much closer to the geological area where carbon is transported for injection.
OXY Carbon Reduction Plans
Occidental is currently on schedule to begin construction on its direct air capture plant, which would be capable of sucking in around 1 metric ton of carbon per year.
In March, Occidental told investors it will spend around 5% of its 2022 capital expenditures on the Permian Basin plant. The company projects that the spending will come to $100 million to $300 million in 2022. The plant will cost between $800 million and $1 billion in total.
Occidental's roadmap calls for bringing three carbon-sequestration hubs online by 2025. The company also plans on building 70 direct air capture plants across the world by 2035. OXY has also created subsidiary Low Carbon Ventures to handle carbon reduction efforts.
"We remain optimistic on carbon capture's outlook as one of the primary solutions for global decarbonization," Goldman Sachs analyst Neil Mehta wrote on July 11.
"One additional consideration for OXY is its CCUS opportunity in EOR/DAC," JP Morgan's Royall added. "However, we think that the upside is fairly long dated with heavy upfront investment a potential drag on medium-term capital."
Occidental's Carbon Paradox
While Occidental has publicly stressed its carbon reduction efforts it is one of the biggest gas emitters in the U.S.
Privately-held Hilcorp Energy, Exxon Mobil, ConocoPhillips and OXY are the U.S. oil-and-gas industry's top emitters of greenhouse gases, according to analysis based on federal data from the environmental nonprofit Ceres and Clean Air Task Force.
The four companies are also the top emitters of methane. The Environmental Protection Agency says methane is more than 25 times as potent as carbon dioxide at trapping heat in the atmosphere.
"The companies that are most able to effectively minimize their own emissions will be best prepared for a future zero-emissions economy," Andrew Logan, senior director of oil and gas at Ceres, said in a statement.
Biden's Climate Bill
On Aug. 16, President Joe Biden signed a broad spending bill, known as the Inflation Reduction Act, into law. The legislation includes around $370 billion in funding and programs to accelerate the transition away from fossil fuels and the buildout of green energy infrastructure across the country.
The bill has several provisions which specifically target the oil and gas industry. The proposal would revive and increase a tax on crude and imported petroleum products to $16.4 per barrel. U.S. refineries receiving crude oil and importers of petroleum products would be hit with this tax. The American Petroleum Institute has stated this would be a $25 billion tax hike on the oil sector.
The legislation would also instate a methane emissions fee and royalty rates on oil and gas produced on federal land.
A Policy Boost For OXY Stock
Biden's climate bill also contains language to increase the 45Q carbon capture tax credit from $50 to $85 per ton.
Th 45Q tax credit has been the main federal incentive urging companies to capture and store carbon. This program has been around for more than a decade. It provides a tax credit of $30 to $50 per metric ton of carbon dioxide.
The gas must remain permanently stored underground. Carbon gas not used to enhance oil production earns a higher tax credit value. The tax incentive got its start as part of the Energy Improvement and Extension Act of 2008. At that time, it provided $10-$20 per metric ton.
With Biden's signature on the bill there is a "strong benefit" to carbon capture focused exploration and production companies such as OXY, California Resources, Denburyand Talos Energy, according to MKM Partners analyst Leo Mariani.
Occidental CEO Vicki Hollub said on Aug. 3 the legislation's 45Q enhancements are "probably the most impactful" for the company.
"This is turning into, for us, a net very positive bill," she said.
OXY Stock Chart
Occidental Petroleum stock began consolidating in June, ahead of the oil price pullback that started at the beginning of August.
Shares had formed a cup with handle with a 66.26 buy point. The stock has generally held up better than many other energy stocks as oil prices have retreated. Earnings reports from Exxon Mobil and Chevron on July 29 helped boost the stock briefly above the 10-week line.
OXY gained 9.8% on Aug. 19, during market trading, breaking out above the base's buy point. Shares soared past a 66.26 buy point, running to 77.13. The stock round-tripped that breakout by Sept. 7. Shares rose 1.55% to 65.61 on Friday, Sept. 9, finding support at its 50-day moving average.
The IBD MarketSmith chart shows most of the stock's cup base formed below its 10-week moving average. That can be a sign of weakness.
Occidental Petroleum ranks first in the Oil & Gas-Exploration and Production industry group. OXY stock has a Composite Rating of 99. It has a 98 Relative Strength Rating, an exclusive IBD Stock Checkup gauging share-price movement. The stock has an EPS Rating of 80.
So is Occidental stock a buy: With the market in correction, it's hard to say any stock is a buy. OXY shares were a buy briefly on Friday, Aug. 19, as they moved through the 5% buy zone above the 66.26 entry. That buy range topped out at 69.57. OXY round-tripped a double-digit gain in its breakout, which is not a good sign.
After that round-trip, the stock now needs to work on a new base. For now, the stock is not a buy.
Please follow Kit Norton on Twitter @KitNorton for more coverage.
