Invest in the Optimal Oil Shares with a $200 Budget Today
Warren Buffet, renowned for his stellar investment record, keeps a keen eye on his portfolio. Among his holdings, there's a notable oil company that's caught his attention. In fact, Buffet might even consider purchasing the entire company someday.
Delving into the details, this oil stock is still accessible to the public. If you have around $200 set aside for non-essential expenditures, this could be an opportune moment to invest in one of Buffet's substantial bets, thanks to the stock's recent fall.
2 Reasons Why Buffet Loves This Oil Company
Buffet mainly conducts his investments through his holding company, Berkshire Hathaway, which boasts a portfolio worth billions. Among its top 10 investments are well-known, esteemed businesses. However, the sixth largest holding might surprise you. It's an oil company many haven't heard of: Occidental Petroleum (OXY 1.41%).
The charm of Occidental isn't hard to decipher for Buffet. He's made several comments about the company since his initial investment in 2019.
During a summer interview with CNBC, Buffet praised Occidental's annual report, stating, "I read every word and said, this is exactly what I would be doing." He also commended the CEO for managing the company effectively.
Effective capital management is crucial for any business, but especially in the oil industry with its constant need for resource exploration or property acquisitions, considering all related costs. Buffet believes Occidental excels in smart capital management.
While he hasn't explicitly mentioned it, Occidental might also appeal to Buffet due to its oil price exposure. Most oil investors typically anticipate rising oil prices, given the difficulties faced by oil operators in downturn markets.
If you're confident in oil prices staying stable or even increasing in the long term, Occidental's acquisition of CrownRock for approximately $12 billion is an appealing prospect. This acquisition will heighten the company's cash flow but also increase its debt and exposure to high-decline shale assets.
Currently, West Texas Intermediate (WTI) crude oil is trading at around $70 per barrel. With the CrownRock acquisition, Occidental expects its cash flow per share to total around $4.22 per share. If oil prices rise to $75 per barrel (a 7% increase), Occidental estimates its free cash flow per share would increase to $5.27 (a 25% increase). In essence, Occidental is primed for substantial growth in an upward-trending environment.
How to Invest Wisely in Occidental Petroleum
Companies dealing in natural resources are susceptible to uncontrollable volatility. Occidental falls under this category. Since April, the company's share price has declined by almost 30%.
The primary reason wasn't directly related to Occidental but instead stemmed from a 20% drop in oil prices over the same period. Occidental, too, experiences upside potential in a rising-price scenario, but downside pressure if prices tumble.
Beyond pricing volatility, Occidental is a well-managed business, according to Buffet. If you share this sentiment, consider leveraging these price corrections.
Post-decline, Occidental shares are trading at 11.5 times expected free cash flow at $70 WTI oil prices, a fair price for those optimistic about oil's long-term pricing. However, be prepared to double down if oil markets show further weakness, which will likely impact Occidental shares negatively.
Occidental has various financial tools to utilize in such situations, such as suspending its share buyback program and cutting its 1.8% dividend. When oil prices recuperate, Occidental should be well-equipped to bounce back. Just remember: long-term investors are likely to see better returns if crude oil prices don't weaken further.
Given Warren Buffet's investment in Occidental Petroleum, it's worth considering putting some of your spare 'money' into this oil company. Buffet's holding company, Berkshire Hathaway, believes in Occidental's effective 'capital management' and smart decisions, which are crucial in the volatile 'finance' of the oil industry.
