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Warren Buffett keeps pumping cash into the oil patch, upping Berkshire Hathaway’s (BRK.B, $267.52) stake in Occidental Petroleum (OXY, $56.09) by more than a half-billion dollars in a series of recent purchases.

And in fact, Buffett’s ever-growing ardor for the Houston-based integrated oil and gas firm has some analysts speculating that the Oracle of Omaha could be eyeing a complete buyout of Occidental Petroleum in the not-too-distant future.

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Regulatory filings late Wednesday revealed that Buffett scooped up another 9.6 million shares of OXY stock worth about $530 million. Berkshire was required to disclose the trades (the last of which was made on June 22) within three business days because it owns more than 10% of OXY’s shares outstanding. 

Looking at the Berkshire Hathaway equity portfolio, Buffett now owns a total of 152.7 million shares in Occidental – a position worth about $8.9 billion at OXY’s current share price. With a commanding 16.3% stake in Occidental Petroleum, Berkshire is Occidental’s largest shareholder by far. Asset management giant Vanguard is No. 2 with a 10.9% stake.

BRK.B additionally owns $10 billion worth of 8% preferred shares, as well as 84 million warrants to purchase OXY stock. Occidental shares must trade above the warrants’ exercise price of $59.62 for the warrants to be in the money. If warrants are included, all in, Berkshire owns about a third of Occidental Petroleum.

And one analyst thinks Buffett could take a swipe at the rest.

Truist’s Dingmann: “A Good Chance” Buffett Buys Occidental

Truist Securities analyst Neal Dingmann says these purchases look like a prelude to something much bigger. Indeed, Buffett could acquire the energy giant outright once OXY receives an upgrade to its credit rating.

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“We believe there is a good chance billionaire investor Warren Buffett buys the remaining two-thirds of shares of Occidental that he and Berkshire Hathaway do not own once the company becomes investment grade,” writes Dingmann, who rates OXY stock at Buy. 

The analyst adds that Occidental’s debt “is quickly on its way to becoming investment-grade.” At that point, the company could focus more on returning cash to shareholders. Furthemore, OXY “could fit nicely” with Berkshire Hathaway Energy’s portfolio of assets. 

OXY’s enterprise value, or its theoretical takeout price that accounts for both cash and debt, stands at $88.1 billion. Two-thirds of that total comes to $58.7 billion – a very large acquisition by any measure. 

Buffett Bought the Latest OXY Dip

Whether a takeout is in the offing or not, there’s no question Buffett has been going all in on the energy sector in 2022. 

And this latest move was nothing if not opportunistic.

A retreat in oil prices caused OXY stock to lose about 20% of its value between a 52-week high set on May 27 and the dates on which Buffett pounced. See the chart below:

Getty Images

The latest OXY purchases follow a flurry of buying in the first quarter – a period in which Buffett bought stock at his fastest pace since the Great Financial Crisis. Berkshire acquired 136 million OXY shares in the first three months of 2022. 

It’s easy to see why he bought more in June. OXY, the best performing stock in the S&P 500 this year, went on sale. 

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“Buffett has been consistently adding to his stake in Occidental this year when its price dropped,” says David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business and noted Buffett expert. 

“He has at least a five-to-10-year time horizon,” Kass adds, “and will take advantage of market volatility to add to his stake when the opportunity drops into his lap.”

Just Part of Buffett’s Inflation Gameplan

Sky-high gas prices and the worst inflation readings in four decades make a powerful case for energy stocks. After all, cash is trash when inflation runs hot, and oil is an inflation hedge. 

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The Oracle of Omaha is embracing those facts with both arms. 

Buffett now considers Chevron (CVX), his fourth-largest position, to be one of Berkshire’s “core holdings.” OXY, for its part, is a top-10 investment. 

Here’s why: OXY, Chevron and the rest of the industry is flush with cash thanks to high energy prices. They’re returning that cash to shareholders through stock buybacks and dividends, both of which Buffett adores. 

What’s remarkable about Occidental Petroleum is that, even after more than doubling in price for the year-to-date, shares still look compellingly valued. OXY stock trades at just 5.1 times analysts’ next-12-months earnings per share (EPS) forecast. Meanwhile, analysts expect it to generate average annual EPS growth of 7% over the next three to five years. 

For context, that is much cheaper than the S&P 500. The benchmark index traded at 16.4 times expected earnings as of June 24, and is forecast to generate average annual EPS growth of 14.9% over the next five years, according to Yardeni Research. 

Expressed as a price/earnings to growth ratio (PEG), which sort of measures how fast a stock is rising relative to its growth prospects, OXY’s PEG is 0.7 vs. 1.1 for the S&P 500. By this measure, OXY stock offers a discount of 36% to the S&P 500.  

Little wonder, then, that OXY stock gets a consensus recommendation of Buy on Wall Street. Of the 25 analysts covering the stock tracked by S&P Global Market Intelligence, eight rate it at Strong Buy, three say Buy, 11 have it at Hold, two say Sell and one calls it a Strong Sell. 

True, that amounts to a consensus Buy recommendation with only modest conviction, but the Street might want to rethink its models. Shares in Occidental Petroleum naturally popped on the Buffett news, and it’s hard not to like them even after their latest gains.

Whether a Berkshire buyout is in the future or not, Buffett appears to have put something of a floor under OXY stock.

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