Warren Buffett may be known for his big positions in Apple and Coca-Cola, but the Oracle of Omaha only added to one existing position during the first quarter — and it was an energy stock.
The stock market has gotten off to a red-hot start this year. The technology-heavy Nasdaq Composite is up 11% so far in 2024, fueled by hype in artificial intelligence (AI). Moreover, the S&P 500 has also gained close to 11% — signaling an overall strong profile among broader market sectors.
In particular, the energy industry has performed well so far this year — and Berkshire Hathaway CEO Warren Buffett has taken note. According to Berkshire’s latest 13F filing, Buffett only added to one existing position during the first quarter of 2024.
The Oracle of Omaha scooped up 4.3 million shares of oil and gas conglomerate Occidental Petroleum (OXY -1.12%). Should you follow Buffett’s lead? Let’s find out.
A breakdown of Occidental Petroleum
The energy sector is comprised of many different types of businesses. From nuclear energy, refining, and pipelines, there are loads of companies contributing to the overall energy landscape.
Occidental Petroleum primarily operates as an oil and natural gas exploration business. The chart below illustrates some important operating metrics for the company and provides a glimpse into its long-term performance.
OXY Revenue (Quarterly) data by YCharts
The financial trends above illustrate the ebbs and flows in Occidental’s business. This isn’t entirely surprising. Oil and gas are commodities and can experience dramatic pricing volatility. For this reason, operational results can move significantly.
As shown in the graph above, Occidental Petroleum reported revenue of $5.9 billion during the first quarter of 2024. This represented a 19% decline year over year. Furthermore, net income also dropped from $1.3 billion during the first quarter of 2023 to $888 million this year.
Considering the noticeable volatility levels in Occidental’s business, coupled with declining sales and profitability, why might Buffett be buying shares?
Image source: Getty Images.
A new growth opportunity is emerging
Within the energy realm, one of the more prominent emerging growth opportunities revolves around renewable and sustainable energy programs. While Occidental Petroleum primarily operates in oil and gas, the company has been pursuing a new opportunity: carbon management. Specifically, the company is focused on a process of carbon dioxide removal called direct air capture.
During the first-quarter earnings call, investors learned that Occidental’s first direct air capture plant is on pace to begin operating by the middle of next year. Although this might sound like great news on the surface, bear in mind that these investments come with a heavy price tag. Occidental is planning on spending up to $6.6 billion in 2024 on capital expenditures (capex) — with nearly $600 million being allocated to low-carbon ventures.
Nevertheless, diversifying outside of legacy oil and gas exploration products should help pave the way for a new frontier at Occidental Petroleum. Moreover, management expects the low-carbon ventures business to “generate cash flow detached from oil and gas, price volatility, and further strengthen Oxy’s cash flow resiliency”.
Should you buy shares of Occidental Petroleum?
The chart below illustrates the stock price movement of Occidental over the last three years. You might notice that shares soared in the beginning of 2022. This momentum occurred after it was revealed that Buffett had a position in the company.
Following the brief uptick in price, shares of Occidental have actually remained somewhat muted over the last couple of years. Indeed, there have been some short-lived peaks and valleys, but overall the stock hasn’t moved too dramatically one way or the other.
OXY data by YCharts
Shares of Occidental currently trade at a forward price-to-earnings (P/E) ratio of 16.7. By comparison, the forward P/E of the S&P 500 is 20.8.
The cyclical nature of the oil and gas industry can influence a company’s performance on both a quarterly and annual cadence. The inconsistency of operational trends can definitely impact share prices and, in a way, this can make valuation multiples hard to decipher as they are prone to change relatively quickly.
With that said, Occidental is currently trading at a discount to the broader market. Although this doesn’t necessarily make it an opportunity to buy the dip, I think investors with a long-term horizon might want to consider following Buffett’s lead.
Despite some volatility in the financial profile, Occidental remains highly profitable and free-cash-flow positive. Moreover, the company is aggressively reinvesting these excess profits back into the business to enter new, innovative markets. I think these features are what Buffett cares about as they relate to his investment in Occident Petroleum.
I’m optimistic that the company will bolster its existing operation through its low-carbon exploration business and enter a new growth phase that it can sustain over the long run.
Adam Spatacco has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.