OXY stock looks overheated after doubling this year

Should investors follow Warren Buffett’s lead and buy shares of western oil (NYSE:OXY)? After all, OXY stock has essentially doubled since the start of the year (YTD).

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OXY stock began to climb when news first broke that Buffett was buy billions value of the company’s shares through its holding company, Berkshire Hathaway (NYSE:BRK-A). Over the past month, Occidental Petroleum’s stock price has risen 53.3% to $59.70, taking its year-to-date gains to 105.9%.

Compare this to the reference S&P500 index which is down 8% so far in 2022. Over the past 12 months, Occidental Petroleum’s stock price has risen 120%. While Buffett’s buy served as a vote of confidence in the stock, Occidental’s share price was also boosted by oil prices that are above $100 a barrel and at their all time high. since 2014, as well as a solid balance sheet.

Occidental Petroleum’s stellar performance raises the question of whether investors should follow Buffett and also hoard shares of the Houston, Texas-based oil giant, or whether the stock has rallied too much in recent weeks and must now undergo a correction.

Buffett Power for OXY Stocks

Warren Buffett is arguably the most famous buy and hold investor in the world. The Oracle of Omaha, as Buffett is known, once said his “favorite holding period is forever.”

As an investor, Buffett doesn’t trade a lot of stocks. He held stocks in his portfolio, such as Coca Cola (NYSE:KO) and American Express (NYSE:AXP), for more than three decades. So when Buffett takes a new position in a company’s stock, Wall Street and the broader investing community take notice. Especially when Buffett is buy stocks hand on fist, as it has been with OXY stocks since late February.

To date, Buffett’s company, Berkshire Hathaway, has purchased a total of 118.3 million shares of OXY stock worth $6.9 billion. The average price Berkshire paid for Occidental stock is $56.60 per share, according to filings with the U.S. Securities and Exchange Commission. Berkshire Hathaway now owns nearly 12% of Occidental’s outstanding shares. The company quickly became the ninth largest holding company in The Berkshire Wallet of more than 45 shares.

Buffett said he was inspired to buy Occidental Petroleum stock after reading a transcript of the company’s Feb. 25 earnings conference call. He told CNBC that he started buying OXY stock on February 28 and that his company “bought everything we could”.

Pied Piper Effect

Buffett’s purchase of OXY stock proved to be a huge vote of confidence in Occidental Petroleum. The stock price has risen sharply in recent weeks as other investors follow Buffet’s lead and also buy Occidental shares.

Buffett’s stake comes as oil prices hold above $100 a barrel for the first time in nearly a decade, further bolstering OXY stock and all major oil producers. As of this writing, West Texas Intermediate (WTI) crude oil, the US benchmark, is hovering around $110 a barrel. Additionally, Brent crude, the international benchmark, sits at $114.33 a barrel. The rise was fueled by geopolitical conflict in Europe and global supply constraints.

Additionally, Occidental Petroleum is an established company. In business since 1920, Occidental now has operations in the Texas Permian Basin, the US Rockies and the Gulf of Mexico. It also has overseas operations in the Middle East.

By market capitalization, Occidental Petroleum ranks 23rd among global oil and gas companies. The company is involved in all aspects of the petroleum business, from exploration to manufacturing and marketing. It also has a strong balance sheet, which has only been bolstered by the current rise in oil prices.

Solid balance sheet

Occidental Petroleum released the last quarter (Q4) 2021 adjusted income of $1.4 billion, or $1.48 per share, compared to a loss of $0.65 per share in the same period of 2020, when oil prices turned negative due to the collapse of demand during the pandemic. The company’s earnings in the fourth quarter of 2021 beat analysts’ consensus forecast by 35%.

Occidental’s fourth-quarter revenue was $8.01 billion, beating Wall Street expectations for revenue of $7.39 billion. The company attributed the good results to rising raw material prices and announced that it would pay a regular quarterly dividend of $0.13 per share as of April 15, compared to $0.01 per share last year.

If there’s a blight on Occidental Petroleum’s finances, it’s the heavy long-term debt the company has been saddled with following its acquisition of Anadarko in 2019. That purchase left Occidental with $30 billion in debt.

The company said on its fourth-quarter conference call that it plans to continue to focus on debt repayment with plans to buy back $2.5 billion of its own obligations. Occidental said it hopes its long-term debt will be below $25 billion by the end of the current first quarter. Still, some analysts continue to point to Occidental’s debt as a concern. the median target price among the 25 analysts covering OXY stock is $52, implying a decline of 12.9% from current levels.

Wait for a pullback in OXY stocks

There’s certainly a lot to like about Occidental Petroleum. The fact that Warren Buffett now owns more than 10% of the company’s stock is encouraging, as are Occidental’s earnings and long-term outlook.

That said, the stock has gained 105.9% in less than three months and has been on a hot streak since the announcement of Buffett’s stake in the company. Analysts’ price forecasts indicate that Occidental Petroleum’s stock price has accelerated in recent weeks.

After a huge gain, like the one we’ve seen so far this year, Occidental Petroleum’s stock price can be expected to pull back in the coming weeks or months. Any decline in oil prices will contribute to this decline. So investors who want to take a position in Occidental Petroleum shares should do so on weakness. Wait for the stock to drop before buying. Right now, OXY stocks seems overheated and is not a buy after nearly doubling in the first quarter of this year.

Disclosure: As of the date of publication, Joel Baglole had no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a reporter for the Wall Street Journal and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.

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