Buffett is a value investor at heart. He likes to buy stocks when they trade below their intrinsic value. For Occidental Petroleum, that seems to be at a price point around or below $53 per share, which is Berkshire's average cost for the position, according to an estimate by Barron's. With the oil stock recently hitting its lowest price in three years at around $46 per share, Buffett's company pounced and bought more shares.
The main factor weighing on the oil stock has been weaker oil prices. West Texas Intermediate (WTI), the primary U.S. oil price benchmark, has declined after a strong start to the year. It soared from over $70 a barrel at the beginning of the year to nearly $90 by mid-April. It has since cooled off considerably and was recently below $70 a barrel.
Investors are worried that crude oil prices could continue to fall over the next year. The incoming Trump administration wants oil companies to produce more oil to boost supply. That increased supply would be likely to push down prices, which could help slow the rise of inflation.
Falling oil prices would undoubtedly weigh on Occidental's earnings and cash flow. That was the case in the third quarter. The company sold its oil at an average price of $75.33 per barrel, 6% below the prior quarter. As a result, the pre-tax income of its oil and gas segment slumped from $1.6 billion to $1.2 billion.
However, Occidental has several upside catalysts unrelated to oil prices. It recently closed its needle-moving acquisition of CrownRock, which significantly enhanced its operations in the Permian Basin that runs through parts of Texas and New Mexico. The company expects the deal to add $1 billion to its annual free cash flow if WTI averages $70 a barrel. It will still be strongly accretive if oil prices are below that level.