Warren Buffet has one of the best investing track records of all time. If you want to find profitable investments, just pay attention to Buffett's portfolio.
Digging into his holdings, there's one oil stock that sticks out. In fact, it's possible that Buffett will eventually buy the entire company.
For now, shares remain available to the public. If you have $200 that you don't need for daily essentials, this looks like a great time to jump into one of Buffett's biggest bets, thanks to the stock's recent pullback.
2 Reasons Warren Buffett loves this oil stock
Warren Buffett does most of his investing through his holding company, Berkshire Hathaway, which has a portfolio of publicly traded companies that's valued in the hundreds of billions of dollars. The top 10 positions in the portfolio are full of recognizable, iconic businesses, but the sixth largest holding might surprise you. It's an oil company that most everyday citizens haven't heard of: Occidental Petroleum (OXY 0.75%).
It's not hard to figure out what Buffett likes so much about Occidental. He's commented on the position a lot since he first started buying shares in 2019.
This summer, for instance, Buffett told CNBC about when he first read the company's annual report. "I read every word, and said this is exactly what I would be doing," he said, adding that the CEO is "running the company the right way."
Capital management is key for any business, but especially in the oil industry where producers constantly need to either explore for more resources or acquire additional properties, factoring in all the associated costs into its projected profits. Small mistakes can compound into capital disasters. From his perspective, Buffett thinks Occidental is one of the best when it comes to managing its capital efficiently.
While he hasn't commented on it specifically, Buffett also may like Occidental for its exposure to rising oil prices. Most oil investors are bullish on oil prices, given most oil operators tend to struggle in downward pricing environments.
However, if you're confident that oil prices will remain stable or even rise long term, Occidental is a great place to be because it recently agreed to acquire CrownRock for roughly $12 billion. This will add immediate cash flow for the company, but also additional debt and increased exposure to high-decline shale assets.
The West Texas Intermediate (WTI) crude oil is roughly $70 per barrel today. With the CrownRock acquisition, Occidental expects its cash flow per share to total around $4.22 per share. If oil prices rise to $75 per barrel, a 7% increase, Occidental believes its free cash flow per share would jump to $5.27 -- a 25% increase. Put simply, Occidental has a lot of leveraged upside in a rising-price environment.
This is the best strategy for investing in Occidental Petroleum
Companies that extract natural resources and sell them into a global market are exposed to volatility they can't control. Occidental is no different. Since April, the company's share price has declined by nearly 30%.
The main cause wasn't specifically due to Occidental but because of market prices for oil, which declined by nearly 20% over the same time period. Just as Occidental has leveraged upside in a rising-price environment, it also has leveraged downside in a falling-price environment.
Outside of pricing volatility, Occidental is a well-run business, at least as far as Warren Buffett is concerned. If you agree, consider taking advantage of these corrections.
After the decline, Occidental shares are trading at 11.5 times expected free cash flow at $70 WTI oil prices. That's a fair price for those who are bullish on oil's long-term pricing. Just be willing to double down should oil markets show further weakness, a reality that will undoubtedly pressure Occidental shares further.
The company has plenty of financial levers to pull in such a scenario, such as suspending its share buyback program and lowering its 1.8% dividend. When oil prices reverse course, Occidental should be ready to capitalize. Just be sure you're a long term oil bull, for shares likely have little chance of outperforming the market if crude oil prices weaken from here.
