The typical advice in the financial market is to never blindly follow a whale investor like Warren Buffett. However, these investors' reverse-engineering investment decisions can often prove helpful. Today, Warren Buffett didn't buy more shares of Occidental Petroleum Co. (NYSE: OXY) because the economy is slowing but because a commodity supercycle could be about to push oil prices higher.
After nine consecutive days of buying, which isn’t usual for Buffett, it looks like the oracle of Omaha found a company worthy of his recent all-time high cash pile held inside Berkshire Hathaway Inc. (NYSE: BRK.A). Buffett’s stake in Occidental is now as high as 29%, which is something to consider going forward.
But Occidental doesn’t operate by itself in the energy sector. Competitors like Hess Co. (NYSE: HES), Chevron Co. (NYSE: CVX), and even Exxon Mobil Co. (NYSE: XOM) are the ones to peg Buffett’s choice against in this coming cycle, and for reasons that will become clear in just a bit, Occidental stock is the one that deserves – not only Buffett’s – the market’s attention.
Buffett’s Insights: Why the Energy Sector is Set to Surge
While not publicly quoted, investors can attempt to navigate Buffett’s mind by breaking down the drivers behind the potential oil rally coming up. Starting at the top, here’s how the U.S. economy is today.
It could be better, as GDP growth was revised to only 1.3% over the past quarter. Now, that only gives the Federal Reserve (the Fed) another reason to consider cutting interest rates this year, where the CME's FedWatch tool predicts these cuts to come by September 2024.
Another pain point can be found inside the ISM manufacturing PMI index, which has been contracting for over a year and a half. However, the latest issue (covering the manufacturing sector for May) showed the oil industry going on a sudden breakout.
New orders increased, production increased, and employment increased. These three measures carry arguably the heaviest weighing inside the PMI report, so investors can see how the oil industry is getting ready to ramp up production despite being inside a contraction. And that’s good for a cheap stock like Occidental Petroleum.
Warren Buffett Sees Opportunity in Occidental Petroleum's Discounted Stock
Occidental stock is a potential steal today on a price-to-free cash flow basis. The company’s financials show That It generated a five-year average free cash flow (operating cash flows minus capital expenditures) of $6.4 billion.
Occidental stock has a $54.4 billion market capitalization today, which is 8.5 times its five-year average free cash flow. Exxon Mobil stock is 15.6 times, Chevron is 14.3 times, and Hess is over 100 times.
More than that, Occidental’s free cash flow has grown at a five-year compounded average growth rate (CAGR) of 40%, making it a steady and predictable return on Buffett’s investment.
Because Occidental stock has superior profitability at a discount in this case, Wall Street analysts have chosen to reflect this fact for the next 12 months. Current earnings per share (EPS) growth projections stand at 28.5% for Occidental stock, where its peers also fall behind.
Chevron’s EPS is set to grow by 15.6%; analysts couldn’t find a reason to push Exxon’s future EPS above 8.8%. While Hess got closer to Occidental stock with its 17.3% projection, it still falls behind by over 10%.
With this growth in mind, Buffett isn’t the only one who thinks Occidental Petroleum stock could have some decent upside ahead. Scotiabank boosted its valuations on Occidental stock as high as $90 a share, daring the stock to rally by 46.3% from where it sits today.
Goldman Sachs Supports Warren Buffett's Oil Investment Thesis
For better or for worse, Goldman Sachs predicts that oil prices could reach $100 a barrel this year. The factors driving this push can be tied to the recent breakouts in the manufacturing PMI or the fact that potential interest rate cuts could boost business activity overall.
As businesses access cheaper financing and demand trends rise on a more confident consumer, oil will be in the eye of the demand storm. Buffett is known for taking the long-term view, so here’s a guesstimate of where that view is.
Rising trends in the artificial intelligence space are also bullish for oil; why? Well, data centers and computing power will draw on a significant amount of energy to function and train these AI models, and that’s where fossil fuel energy sources (like oil) will come into play.
In other words, Nvidia’s success could also be Occidental stock’s success or at least a portion of it.
