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Warren Buffett’s Berkshire Hathaway portfolio has outperformed the overall market in 2022, largely due to his holdings in the oil and gas space. 

His sixth-largest holding, approximately 4.3% of the portfolio, is Occidental Petroleum (OXY). It’s also financial pros’ top oil and gas stock search over the last month.

Buffett’s slowly been buying up shares in what many speculate will become a takeover.

The stock is up a whopping 130% year-to-date. Is there still time to get in? Today, we take a deep dive to answer that question. 

Occidental Petroleum’s Business

Occidental Petroleum is one of the world’s largest oil and gas producers. It operates through three segments: Oil & Gas, Chemical, and Midstream & Marketing. 

Although Occidental does business in the Middle East, Africa, and Latin America, most of the firm’s revenues come from the United States. 

Its oil and gas business is its greatest source of revenue. 

However, OxyChem, the firm’s chemical business, had its highest earnings in over 30 years during Q2 2022. In addition, the firm generated $4.2 billion in free cash flow and retired $4.8 billion in debt during Q2 2022. 

Of course, protecting the environment is a hot topic these days. OXY has a plan to achieve net zero total emissions by 2050. 

Warren Buffett built a stake in the company over several months, recently crossing the 20% threshold. In August, energy regulators gave Buffett permission to buy up to 50% of OXY common stock.

Financials

OXY has more than doubled its revenues from $10.3 billion to $26.3 billion from 2016 to 2021. 

Its revenues depend on the oil price, as its main business is in exploration and production. 

For example, it did $21.9 billion in 2014 before the fracking boom took off, and then $10.3 billion in 2016 after markets were awash with cheap U.S. oil. That said, the firm is on pace to have its best year yet. Its 12-month trailing revenues are currently $33.7 billion. 

The firm dishes out a $0.52 annual dividend.

Additionally, it repurchased over 18 million shares through August 1, 2022. 

OXY has $1.3 billion in total cash and $23.4 billion in total debt. The company has a current ratio of 1x, which isn’t the best, but it has enough liquid capital to pay off its short-term liabilities. 

Valuation

OXY has a P/E GAAP ratio of 6.5x, which is better than most of its competitors and relatively cheap compared to the broader market.

For example, of its top competitors, EOG Resources (EOG) is at 12.3x, Devon Energy (DVN) is at 8.6x, and ConocoPhillips (COP) is at 9.7x. Only APA Corporation (APA) at 4.6x has a lower P/E GAAP ratio. 

OXY’s price-to-sales ratio of 1.8x is lower than most of its competitors, except for APA’s 1.2x. 

Profitability

OXY has a gross profit margin of 66.6%, which is in line with its competitors. APA is higher at 70.8%, but it’s a significantly smaller company by market cap. 

Similarly, OXY boasts a net income margin of 32.6% that trounces its competitors. Further, the firm has an operating margin of 34%. 

No wonder Warren Buffett has invested so much in the company. 

However, OXY has a return of total capital of 13.2%, significantly lower than its competitors. For example, APA’s is 43.5%, and DVN’s is 25.9%. 

OXY does have $14.7 billion in cash from operations. Only COP, which is twice the size, beats it with $23.6 billion in cash flow.

Growth

It’s been a great year for oil companies despite the declining overall market.

OXY’s grew 72.8% year over year. While that’s impressive, its competitors have done even better. 

For example, EOG’s revenues grew 93%, DVN’s 120%, APA’s 83.3%, and COP’s 125.6%. Even more impressive is OXY’s EBITDA growth of 125%, though DVN’s was 325.9% and COP’s was 190.8%.

Our Opinion  9/10

Given all the geopolitical risk and inflation concerns, investors need exposure to the oil and gas space. 

OXY is one of the best companies out there, which is why Warren Buffett has such a significant stake in the firm. 

We believe the stock will continue to do well for at least another year or two due to structural changes in oil supply and supply chains. It’s a worthy addition to anyone’s portfolio.

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