Given that Occidental stock has more than quadrupled so far in 2018 and is the best performance in the S&P 500, it is likely that Warren Buffett was pleased with Occidental Petroleum’s earnings report for the second quarter.
Buffett’s Berkshire Hathaway (BRK/A, BRK/B) is the largest shareholder in Occidental Petroleum (Ticker OXY), which recently exceeded profit projections, paid down roughly $5 billion in debt, and is now planning to return more cash to shareholders.
Occidental shares, on the other hand, are currently trading at $64.20, which is a decrease of 1.3 percent after hours.
Until August 1st, Occidental had repurchased a total of $1.1 billion worth of its own stock, with approximately half of that amount occurring in the month of July and the remaining portion occurring during the second quarter. At the end of the month of June, Berkshire’s holdings of 181.7 million Occidental shares constituted a 19.5 percent ownership in the company. In the second quarter, Occidental earned an adjusted $3.16 per share, which was higher than the average forecast of $3.03 per share and a significant increase from the 32 cents earned in the same time a year earlier.
As Occidental completes a $3 billion buyback programme over the next few months, Berkshire’s stake is expected to reach 20 percent of the company. Berkshire would be able to account for a proportional share of Occidental’s profits in its own earnings if it held a stake equal to twenty percent of the company. This would result in an increase of approximately $2 billion for Berkshire’s reported earnings; nevertheless, there would not be a significant amount of cash associated with these earnings.
Cole Smead, co-manager of the Smead Value fund, which has Occidental shares, argues that the company is “killing it” in terms of increasing book value per share. Where else can you discover a company that is expanding book value as rapidly as this one? According to his calculations, Occidental was able to increase its net worth per share by around 11 percent during the time period while also generating enormous returns on equity.
Occidental’s approach over the past few quarters has been to use its considerable free cash flow to pay down debt, which as of June 30 was $21.7 billion, and effectively transfer wealth to shareholders who now own a greater piece of the business. On June 30, the total amount of debt was $21.7 billion. Smead and a few other people have the opinion that Berkshire CEO Buffett is ecstatic about this tactic.
Berkshire owns a nearly 20 percent investment in the common equity of Occidental, as well as warrants to purchase 83.9 million shares of Occidental at a price of $59.62 per share and $10 billion worth of 8 percent preferred stock.
In the coming years, Occidental will direct the majority of its attention toward increasing shareholder returns rather than decreasing the amount of debt it owes. This might involve an increase in the dividend, which is currently only 52 cents per year, which results in a yield of less than 1 percent. Occidental is one of the only oil corporations that is not returning a significantly larger amount of cash to shareholders than its competitors.
It is possible that Occidental will be able to begin repaying the high-rate Berkshire preferred in the year 2023. The corporation is required to begin paying off the preferred if it returns more than $4 per share to its common shareholders in a given year. This requirement is based on a calculation.
Investors will be interested to hear what Occidental CEO Vicki Hollub has to say about the business’s capital allocation, dividends, debt reduction, energy output, and any hint regarding Berkshire’s intentions during the conference call that the company will hold on Wednesday morning. After significantly expanding Berkshire’s investment in recent months, several people believe that Warren Buffett may wish to buy the remaining shares of Occidental. It was unsuccessful in trying to contact Berkshire for a comment right away.
Smead believes that Occidental’s stock, which has more than doubled so far this year and is the best performance in the S&P 500, still presents an attractive investment opportunity. Its current price is just six times earnings per share. “It is demonstrably inexpensive in comparison to anything else that you are able to achieve with capital.” He gives it a value of approximately $100 per share and speculates that Buffett could be willing to buy it for $90 per share.
Occidental is a major energy producer in the United States. The company gets approximately 80 percent of the more than one million barrels of daily energy output that it generates from within the country. And Buffett is particularly fond of American businesses.