Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Is Warren Buffett Right about Occidental Petroleum?

The catastrophic collapse of oil prices calls Warren Buffett’s investment in Occidental Petroleum (NYSE: OXY) into question.

Coronavirus is devastating the oil markets by reducing the demand for petroleum products such as gasoline and diesel fuel. Incredibly, Markets Insider estimates one popular crude oil variety; West Texas Intermediate (WTI), closed at a negative price of -$37.63 a barrel on 20 April 2020.

 However, WTI’s price rose to $16.50 a barrel at close on 23 April 2020 and $21.27 on 4 May 2020.  In contrast, Mr. Market paid $61.06 a barrel for WTI on 31 December 2019. Thus, WTI lost over two-thirds of its value in the first four and a half months of 2020.

Oil is Crashing

Under those circumstances many observers are predicting a collapse of the oil industry. For instance, The Jacobian’s Chris Saltmash predicts the oil industry could contract by 10%.

Moreover, Goldman Sachs (NYSE: GS) predicts another oil price crash because of oversupply in the markets, The Oil Price reports. Goldman Sachs analysts expect another oil crash in the next two months because of huge supplies and low demand.

Berkshire Hathaway (NYSE: BRK.B) is vulnerable to the oil price collapse because Gurufocus estimates it owned 18,933 shares of Occidental Petroleum Corporation (NYSE: OXY) in first quarter 2020. In addition, Berkshire Hathaway (NYSE: BRK.A) owned 15,019 shares in Suncor Energy Inc. (NYSE: SU). Suncor is a Canadian oil company.

In 2020, Occidental’s share price fell from $42.58 on 2 January to $13.81 on 24 April 2020. Similarly, Suncor’s share price fell from $32.78 on 2 January 2020 to $15.60 on 24 April 2020 and $15.52 a share on 4 May 2020.

What Value does Occidental Petroleum have?

Occidental Petroleum produces oil and gas in the Permian Basin, the Rocky Mountains, the Gulf of Mexico, the Middle East, Columbia, and Africa.

In addition, Occidental’s subsidiary OxyChem manufactures PVC resins (raw plastic), chlorine, and caustic soda. Importantly chlorine is a disinfectant that kills viruses, including COVID-19, so Occidental can make money from coronavirus. OxyChem is the world’s largest manufacturer of caustic soda is an essential building block in soaps and disinfectants. OyxChem operates 22 manufacturing facilities in the United States.

Plus, Occidental owns pipelines, gas processing plans, and three large natural gas-fired power plants. Thus, Occidental has value beyond oil.

Is Occidental Petroleum Making Money?

Strangely, Occidental was doing well before coronavirus. For instance, Stockrow estimates OXY’s revenues grew at a rate of 31.92% in the quarter ending on 31 December 2019.

In that quarter, Occidental made a gross profit of $4.275 billion on revenues of $6.282 billion. However, Occidental reported a -$1.086 billion operating loss and a -$1.336 billion common net loss for that quarter.

Interestingly, Occidental Petroleum reported a quarterly operating cash flow of $2.09 billion on 31 December 2019. However, Occidental reported a negative ending cash flow of -$1.791 billion for the same quarter.

Is Occidental Petroleum Worthless?

Thus, Occidental was losing money before coronavirus. Now, Occidental faces a new world in which one of its primary assets; oil could be practically worthless for over a year. 

To explain, some experts including Dr. Anthony Fauci think the coronavirus pandemic could last for 18 months. Fauci is the director of the National Institute of Allergy and Infectious Diseases, and President Donald J. Trump’s (R-Florida) top advisor on pandemics.

To clarify, Fauci thinks it could take 18 months to develop a coronavirus vaccine. A vaccine could be the only practical way to contain COVID-19.

Under those circumstances, it could be months or years before Occidental makes money again. Consequently, Occidental’s stock could collapse.

What Value Does Occidental Petroleum Have?

However, Occidental had some value in the form of $3.512 billion in cash and short-term investments and total assets of $109.330 billion on 31 December 2020.

Additionally, Occidental paid a 79₵ a share quarterly dividend on 9 March 2020. Plus, calculates, Occidental offered investors a 19.04% dividend yield, a $3.16 annualized payout, and 17 years of dividend growth on 24 April 2020.

I consider Occidental Petroleum (NYSE: OXY) a good cheap dividend stock with a low margin of safety. Only those with a high tolerance for risk who can afford to lose money need to investigate OXY in today’s oil market. I advise everybody else to stay away from Occidental Petroleum because I think Oxy and the oil market will collapse soon.

Thus, Warren Buffett was right about Occidental Petroleum before coronavirus. Today, however, I think OXY is too risky to be a value investment.

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