After a number of warnings to buyers that one should not overpay for Occidental Petroleum Company (NYSE:OXY), even Warren Buffett and Berkshire Hathaway (BRK.B, BRK.A) overpaid for the inventory. The impartial power firm now faces plunging power costs that usually happen throughout weak financial intervals. My funding thesis is extra Bearish on the inventory till oil costs shake out at decrease costs.

Buffett Nonetheless Loading Up

My authentic warning on OXY was for buyers to not chase the inventory into the $60s and particularly the $70s as a result of Buffett not shopping for many shares above $60. Berkshire Hathaway did not buy any shares for over 5 months after the inventory spent the Winter principally buying and selling above $60.

Final week alone, the funding agency purchased 7.9 million shares for almost $500 million. For the reason that begin of March, Buffett has purchased 13.7 million shares at costs usually above $60.

The issue now’s that regardless of Buffett prudently not chasing the inventory increased, a lot of the purchases within the final 12 months are literally underwater. Not solely had been buyers harmed by chasing the inventory, but additionally buyers at the moment are dropping cash by shopping for OXY anytime for the reason that Russian invasion of Ukraine.

Buffett’s Berkshire Hathaway lately boosted their stake to 23.1% with a place of 208 million shares. The funding agency additionally owns 100,000 shares of sequence A most popular shares and warrants for an extra 83.9 million shares at an train worth of $59.624.

Disappearing Earnings

The power firm spent 2022 benefitting from elevated power costs as a result of Russian aggression. Now, the worldwide banking disaster has WTI costs down under $70 after spending a part of 2022 above $100.

Simply a few weeks in the past, OXY reported This fall’22 earnings the place EPS estimates missed analyst targets by a large $0.22. The power firm reported a quarterly EPS of $1.61, already down almost 50% from the Q2’22 peak EPS of $3.16.

With power costs collapsing, buyers want a giant reminder of how OXY solely earned $1.62 in all of 2019 when the corporate final reported a clear 12 months. This 12 months was the final one with out the covid impression or the Russian enhance.

In This fall’22, OXY had the next common realized power costs:

• Crude oil – $83.64 per barrel.
• Pure gasoline liquids – $26.35 per barrel.
• Home realized Nat gasoline costs – $4.45 per Mcf.

Buyers solely want to have a look at oil costs buying and selling under $70 within the case of WTI and home pure gasoline costs at solely $2.52 per Mcf to see how the equation has modified.

The funding story is certainly totally different now with the stability sheet improved from the large earnings as a result of Russian invasion sending oil costs hovering. Attributable to internet debt dipping to solely $18 billion, OXY should not face the identical draw back threat of the inventory falling into the $20s just like the covid weak point.

OXY was a $40 inventory previous to covid and the corporate most likely should not face the identical draw back threat. One difficulty is the disappearing earnings stream, although analysts oddly nonetheless forecast a $6+ EPS in 2023 solely dipping to barely under $6 in 2024.

Nothing concerning the present power costs is supportive of OXY producing premium earnings going ahead. A chief instance of the place earnings are headed was the Q3’21 quarter when the power firm generated a $0.87 quarterly revenue on the next realized power costs:

• Crude oil – $68.74 per barrel.
• Pure gasoline liquids – $34.01 per barrel.
• Home realized Nat gasoline costs – $3.35 per Mcf.

All the present power costs are both at comparable ranges within the case of WTI or a lot decrease within the case of NGL and domestics nat. gasoline. A few of these power costs is perhaps at unsustainably low costs, however a home recession will clearly stress WTI and home nat. gasoline costs for some time.

The inventory trades at almost $60 and OXY seems to solely have an earnings stream within the $3 to $4 per share degree, assuming WTI costs do not fall additional. The inventory is just too costly at as much as 20x EPS targets. Additionally keep in mind, this valuation relies on 950 million shares excellent (up from 900 million in Q3’21) and the corporate has the potential for considerably extra shares excellent by way of changing the popular shares and warrants.

Takeaway

The important thing investor takeaway is that buyers can do worse than shopping for alongside Buffett. Sadly, the power market is weak and OXY really seems very costly at these ranges. The inventory wants one other $5 to $10 dip to develop into interesting, particularly contemplating the market does not seem prepared for the plain EPS reset to decrease ranges.