Occidental Petroleum stock: Why is it declining despite Berkshire’s continuous buying?

Warren Buffett’s Berkshire Hathaway has been on a buying spree, accumulating shares of Occidental Petroleum (NYSE: OXY). Over the past month alone, Berkshire has invested a staggering $434.82 million in Occidental, bringing its stake in the oil company to nearly 29%.

This purchase includes over 2.9 million shares acquired in three transactions on June 13, 14, and 17, according to exchange filings. Berkshire’s recent buying activity marks nine consecutive business days of purchasing Occidental shares. This aggressive accumulation indicates Buffett’s confidence in Occidental’s long-term value, even as the stock has seen a dip of nearly 6% in May and over 2% decline this month.

This continuous acquisition spree by Berkshire, which also holds warrants to buy an additional 83.9 million Occidental shares at a favorable price, suggests a strategic positioning for future gains. Despite Berkshire’s bullish actions, the broader market sentiment towards Occidental remains tepid, with significant short interest and recent downgrades by analysts.

Occidental petroleum’s fundamental performance

Occidental Petroleum’s business fundamentals show a mixed picture. The company has been actively involved in strategic ventures, including a joint venture with Berkshire Hathaway Energy for lithium extraction.

This project aims to leverage Occidental’s expertise in managing brine and BHE Renewables’ geothermal operations to produce high-purity lithium compounds, a crucial component for the green energy sector. This move signifies Occidental’s strategic shift towards sustainable energy solutions and diversification beyond traditional oil and gas.

However, despite these promising ventures, Occidental faces challenges on several fronts. The company’s Q1 earnings reported a drop in production and a 15% decline in adjusted EPS compared to the previous quarter. While Occidental’s operational resilience is notable, especially in natural gas pricing, overall upstream income fell by 15% quarter-over-quarter due to lower commodity prices.

Analyst views and ratings

Analysts have recently downgraded Occidental’s stock. Truist Securities, for example, downgraded Occidental from Buy to Hold, lowering the price target to $69 from $84. This downgrade was attributed to the stock’s premium valuation, which is considered higher than its historical average.

Analysts foresee minimal shareholder returns in the near future as Occidental plans to use its free cash flow and proceeds from asset sales to reduce its significant debt burden, currently standing at around $19.9 billion, expected to rise with the upcoming CrownRock acquisition.

Valuation concerns

Occidental’s valuation remains a point of contention. Despite a robust strategic vision and potential growth avenues in green technology and natural gas, the stock is seen as expensive relative to its peers.

The company’s forward earnings yield is significantly lower compared to other exploration and production (E&P) companies and integrated energy firms. This discrepancy is partly due to substantial payments on preferred shares held by Berkshire, which impacts Occidental’s net profit conversion rate.

Moreover, the anticipated closing of the $12 billion CrownRock acquisition by August 2024, while expanding Occidental’s production capacity, also adds to its debt load. Management’s focus on debt reduction means that significant shareholder returns, through dividends or buybacks, are unlikely in the near term.

Future growth prospects

Occidental is not solely reliant on traditional oil and gas operations. The company is actively investing in carbon capture projects and exploring the potential of natural gas exports, which could significantly boost earnings as global demand for cleaner energy sources grows.

Despite these initiatives, the market’s reaction has been lukewarm, likely due to the cyclical nature of the energy sector and recent historical precedents where the industry faced significant downturns. Investors appear cautious, reflecting concerns over commodity price volatility and the substantial debt load Occidental carries.

Now let’s see what the charts have to say about the stock’s price trajectory. This technical analysis will delve into the stock’s price patterns, trading volumes, and key support and resistance levels to provide a clearer picture of where Occidental Petroleum’s stock might be headed in the near term.

Rangebound medium-term, weakness in short-term

Despite the recent weakness that shares of Occidental Petroleum have seen since April, they have largely been trading in a narrow $55-$70 range since the start of 2023, which is not ideal for either bulls or bears.

OXY chart by TradingView

However, for short-term traders, this represents a good opportunity to buy the stock near the lower end of this range and sell it at the upper end of the range. Conversely, they can short the stock near the upper band while keeping a stop loss a few cents above $71.5 and book profits near $55.

For investors who are bullish on the stock and want to replicate Mr Buffett’s move, buying the stock at current levels also may prove lucrative as the stock is getting support from Berkshire buying. If the stock doesn’t go below $54.5 in the medium term, they can hold it for a breakout above $70.

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