The Zhitong Finance App learned that recently, the continued decline in international oil prices has put pressure on oil and gas stocks, including Occidental Petroleum (OXY.US). During this period, “stock god” Buffett bucked the trend and increased his holdings of Western Petroleum, which baffled many investors. However, investment agency Stone Fox Capital warned not to follow Buffett's lead over Western oil.
In fact, Stone Fox Capital has warned investors many times not to go overboard and buy. Although Buffett paid too much for the stock, the independent energy company is now facing a sharp drop in energy prices that usually occur during periods of economic weakness. The agency said it was pessimistic about Occidental Petroleum before oil prices fluctuated at lower prices.
Buffett is still increasing his holdings
Stone Fox Capital's initial warning to Western oil investors was not to buy stocks higher than $60, especially $70, because the agency believes Buffett won't buy the stock in large quantities above $60. Buffett's Berkshire Hathaway (BRK.A.US), a subsidiary of Buffett, has not increased its stock holdings for more than 5 months during the period when the stock traded above $60 during most of the winter.
However, last Monday week alone, the investment company bought 7.9 million shares at a price of nearly 500 million US dollars. Since the beginning of March, Buffett has bought 13.7 million shares of Occidental Petroleum at a price close to $60.
Berkshire Hathaway recently raised its shareholding ratio to 23.1%, holding 208 million shares. The investment company also owns 100,000 Series A preferred shares and warrants that can purchase an additional 83.9 million shares at an exercise price of $59.624.
Although Buffett carefully didn't overtake the stock, the problem now is that most of the stocks he bought last year were actually below current levels. Not only have most investors been hurt by chasing this stock, but since the Russian-Ukrainian conflict broke out, investors could lose money by buying Occidental Petroleum stocks at any time.
Disappearing Profits
Benefiting from the rise in energy prices caused by the Russia-Ukraine conflict, WTI crude oil prices were above 100 US dollars for most of 2022, which also greatly increased the profits of Occidental Petroleum. But now, the global banking crisis has brought WTI crude oil prices below $70.
Just a few weeks ago, Occidental Petroleum announced results for the fourth quarter of 2022, with earnings per share falling $0.22 below analysts' expectations. The energy company reported quarterly earnings of $1.61 per share, which is already nearly 50% lower than its peak of $3.16 in the second quarter of 2022.
According to financial reports, the average realized energy prices of Occidental Petroleum for the fourth quarter of 2022 were: crude oil — $83.64 per barrel; liquefied natural gas — $26.35 per barrel; and domestic gas realized price — $4.45 per thousand cubic feet.
However, as energy prices plummeted, investors should note that Occidental Petroleum's earnings per share for the full year of 2019 were only 1.62 US dollars. This was the last year affected by no disruptive factors (COVID-19 or the Russian-Ukrainian conflict).
As oil prices soared due to the Russia-Ukraine conflict, Occidental Petroleum's balance sheet has improved, so the stock's current investment situation is definitely different from the past. Currently, Occidental Petroleum's net debt has fallen to only 18 billion US dollars. This should not allow the stock to face a downside risk similar to that caused the stock price to fall to $20 due to the COVID-19 pandemic. Before the outbreak of the epidemic, the stock price was around $40.
However, one problem facing Occidental is the disappearance of revenue streams. Although analysts strangely predict that Occidental's earnings per share will exceed $6 per share in 2023 and only slightly below $6 by 2024, current energy prices do not support the company in generating premium earnings in the future.
The third quarter of 2021 is a good example for judging Western oil earnings trends. The energy company generated quarterly profit of $0.87 per share at the following average realized energy prices: crude oil — $68.74 per barrel; liquefied natural gas — $34.01 per barrel; and domestic gas realized price — $3.35 per thousand cubic feet.
As can be seen, all energy prices are now either close to the crude oil prices mentioned above, or lower than the realized prices of liquefied natural gas and domestic natural gas. Although some energy prices may currently be unsustainably low, it is clear that the domestic economic recession will put pressure on WTI crude oil and domestic gas prices for some time.
The current stock price of Occidental Petroleum is close to $60. Assuming that the WTI price does not fall further, the company's earnings flow per share also appears to be only $3 to $4. As far as a 20x price-earnings ratio is concerned, the stock is probably too expensive. It is also important to note that this valuation is based on 950 million tradable shares (up from 900 million shares in the third quarter of 2021). By converting preferred shares and warrants, the company may significantly increase its tradable shares.
summed
Although investors' operations may be worse without following Buffett's purchase of Occidental Petroleum, the fact now is that the energy market is weak. At these levels, Western Oil actually appears very expensive. Stone Fox Capital believes the stock will need to drop another $5 to $10 to become attractive, especially given that the market doesn't seem ready to face a significant decline in earnings per share expectations.