Warren Buffett probably liked it
second quarter earnings report.
Occidental Petroleum (Ticker OXY), in which Buffett’s
(BRK/A, BRK/B) is the largest shareholder, beat earnings estimates, paid off nearly $5 billion in debt, and is now set to return more cash to shareholders.
Occidental shares, however, were down 1.3% in after-hours trading at $64.20.
Occidental bought back $1.1 billion in shares through Aug. 1 with about half of that total coming in July and half in the second quarter. Berkshire’s holding of 181.7 million Occidental shares represented a 19.5% stake at the end of June. Occidental earned an adjusted $3.16 per share in the second quarter, above the consensus estimate of $3.03 per share and sharply higher than 32 cents in the prior period.
Berkshire’s stake is expected to rise to 20% in the coming months as Occidental completes a $3 billion buyback program. A 20% stake would allow Berkshire to include in its earnings a proportionate share of Occidental’s earnings. That would boost Berkshire’s reported earnings by about $2 billion, though there wouldn’t be much cash associated with those earnings.
“Oxy is killing it in incremental book value per share,” says Cole Smead, co-manager of the Smead Value fund, which owns Occidental. “Where else can you find a company that increases book value so quickly.” He estimates that Occidental grew its net worth per share by about 11% in the period, while earning strong returns on equity.
Occidental’s strategy in recent quarters has been to use its abundant free cash flow to pay down debt, which stood at $21.7 billion as of June 30, and effectively transfer wealth to shareholders who now own a larger stake in the business. . Smead and others believe Berkshire CEO Buffett is enthusiastic about this strategy.
Berkshire owns nearly 20% of the common stock, has options to purchase 83.9 million shares of Occidental at $59.62, and owns $10 billion of 8% preferred stock.
Looking ahead, Occidental will focus more on returning cash to shareholders than paying down debt. That may include a higher dividend, which is now as low as 52 cents a year for a yield of less than 1%. Most energy companies return much more cash to owners than Occidental.
In 2023, Occidental may be able to start paying the high rate Berkshire prefers. Under one formula, the company must begin repaying the preferred if it returns more than $4 per share to its common holders in a given year.
Investors will be interested to hear from Occidental CEO Vicki Hollub on the company’s conference call Wednesday morning for more on capital allocation, dividends, debt reduction, energy production and any indication of its intentions. Berkshire. Some believe Buffett may want to buy the rest of Occidental after Berkshire’s stake has risen sharply in recent months. Berkshire could not be reached for immediate comment.
Smead believes Occidental stock, which has doubled this year and is the top performer in the S&P 500, still looks attractive. It now trades at just six times earnings. “It’s demonstrably cheap compared to anything else you can do with capital.” He values it at about $100 a share and thinks Buffett might be willing to pay $90 a share for it.
Occidental is a major US energy producer, taking about 80% of its more than one million barrels of daily energy production domestically. And Buffett loves American companies.
Write to Andrew Bary at firstname.lastname@example.org