Why Occidental Petroleum Rallied Today

Shares of Occidental Petroleum (OXY +5.22%) rallied 5.1% on Thursday.

Occidental is one of Warren Buffett’s two favorite oil and gas companies and **Berkshire Hathaway’s **(BRKA 0.46%) (BRKB 0.38%) seventh-largest overall public equity position.

Days like today explain why Buffett likes Occidental’s strategic positioning so much. If global oil supplies are cut off in geopolitically fraught geographies overseas, Occidental’s deep, low-cost inventory in the Permian Basin becomes a very valuable asset.

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NYSE: OXY

Occidental Petroleum

Today’s Change

(5.22%) $2.90

Current Price

$58.48

Key Data Points

Market Cap

$55B

Day’s Range

$56.42 - $59.15

52wk Range

$34.78 - $59.15

Volume

1.9M

Avg Vol

13M

Gross Margin

31.94%

Dividend Yield

1.76%

Oil prices spike as Iran vows to keep Strait of Hormuz closed

The ongoing war has pushed up oil and liquefied natural gas prices worldwide. This is because about 20% of global oil supplies flow through the narrow Strait of Hormuz, which separates Iran, Oman, and the United Arab Emirates.

While the IEA and U.S. have each announced large oil releases from strategic petroleum reserves yesterday and today, these are relatively temporary fixes to the problem if the Strait remains closed or limited for an extended period of time.

Today, Iran’s new Ayatollah, Mojtaba Khamenei, released a statement that Iran won’t back down from the war, and that the Strait of Hormuz should remain closed. Meanwhile, at least three commercial ships have been hit by Iranian projectiles over the past 24 hours, making the possibility of opening the Strait seem rather far off at the moment.

Despite the attacks and intransigence of the Iranian regime, President Trump doesn’t appear to be set on ending the war just yet. Today, Trump said that Iran not having nuclear weapons was, “of far greater interest and importance to me” than oil prices, while also noting, “The United States is the largest oil producer in the world, by far, so when oil prices go up, we make a lot of money.”

One of those major U.S. oil producers is Occidental Petroleum, which is one of the largest acreage holders in the United States, especially in the low-cost and plentiful Permian Basin. While Occidental is exploring sites in troubled Middle East geographies, its entire international segment accounts for less than 20% of total barrels. And much of that segment is in Algeria, which does not need the Strait of Hormuz to transport its oil.

Image source: Getty Images.

Should you follow Buffett into Occidental?

Interestingly, even after the rapid year-to-date rise in Occidental Petroleum’s stock, its current stock price is $58.41, which is not that much higher than Buffett’s average cost in the stock of $54.20, according to estimates.

One of the reasons Buffett likes the company so much is its operational excellence, low per-barrel costs, and deep inventory. Last year, the company generated $4.3 billion in free cash flow before working capital, which means it trades at only a 13.5 times free cash flow multiple today, even though those cash flows occurred at last year’s much lower oil prices.

As such, Occidental remains a compelling way to play higher-for-longer oil prices should the war go on longer than thought.