Is there an energy boom in the making? Public policy and social pressures are pushing hard for renewable energy sources – but renewables can’t replace existing conventional sources, leaving oil and gas to benefit from continued increases in demand. And – a boom in oil and gas may already be with us. US oil producers pulled an average of 12.9 million barrels per day out of the ground last year, a world record in oil production and approximately 3 million barrels per day more than Russia or Saudi Arabia.
The combination of high demand and record production helps explain why investing legend Warren Buffett has been buying big in Permian Basin oil plays. Two major Texas oil producers are prominent among the top ten largest holdings in Buffett’s portfolio, and the billionaire investing guru has been increasing his holdings in recent quarters.
Buffett isn’t the only bull when it comes to Big Oil, though. Bank of America’s 5-star analyst Doug Leggate has been looking into the details of both of Buffett’s Big Oil stock picks, and he’s impressed by both companies, particularly their ability to expand production. Let’s take a closer look.
Chevron (CVX)
We’ll start with Chevron, one of the oil industry’s largest names. Chevron Corporation is the world’s third-largest oil company when measured by market cap – the firm is valued at $288.6 billion – and the world’s eighth-largest oil producer when counting by annual revenue – the company generated $196.9 billion at the top line in 2023.
Chevron has built itself up to that scale through its core business activities: the exploration and production of oil and natural gas assets, the large-scale refining of crude oil, the transport of hydrocarbon products, and the operation of a maritime shipping line for crude oil, natural gas, and natural gas products. It’s an interrelated set of activities, making energy resources available to the global economy.
In addition to the above, Chevron is also a major producer and supplier in the important petrochemical field. From the customer-facing perspective, this is probably the most visible segment of Chevron’s business; it includes fuels, lubricants, and additives, many of which are distributed through the company’s nationwide network of Chevron-branded gas stations.
In recent months, Chevron has had two important moves make the news. In the first, the company announced in October of last year that it had entered a definitive agreement to acquire the exploration and production company Hess Corporation, in a transaction worth $60 billion in stock and debt assumption. This agreement is expected to close during 1H24, but may be delayed due to legal wrangling with Exxon Mobil. Hess has a 30% stake in certain Guyana oil assets that are primarily owned by Exxon, and an arbitration case is currently ongoing to determine how that will shake out as Chevron purchases Hess. Exxon has said that it is not interested in purchasing Hess.
In the second recent move of note, Chevron has reiterated its significant interest in Kazakhstan’s Tengiz ‘supergiant’ oil field, northeast of the Caspian Sea. Chevron has a 50% stake in Tengizchevroil, known as TCO, the company formed to exploit the Tengiz field. The reserves in this field are huge, including up to 25.5 billion barrels of recoverable oil. The cost of getting the project fully online is also huge, and Chevron has recently said that those costs will come in 3% to 5% higher than had been previously estimated. Start-up costs in Tengiz are now estimated at approximately $48.5 billion.
Turning to the company’s regular financial results, we find that Chevron reported nearly $47.2 billion at the top line for 4Q23, a figure that was down 16.5% year-over-year and missed the forecast by $6.02 billion. Despite the drop in revenue, the $3.45 non-GAAP EPS was solid, significantly higher than the previous quarter’s $3.05 and some 23 cents per share better than had been forecasted. In the earnings release, the company also announced an 8% increase in the common share dividend, to $1.63 per share. The new dividend was paid out on March 11, and the annualized rate of $6.52 gives a yield of 4.2%.
This is the company that comprises Buffett’s firm, Berkshire Hathaway, the fifth-largest holding in its portfolio. Berkshire Hathaway acquired 15,845,037 shares in Q4 alone. Overall, the firm now owns 126,093,326 shares of CVX, currently valued at $19.75 billion.
When Bank of America’s analyst Leggate looks at Chevron, he sees a company with plenty of sweets to attract investors. Delineating those attractive factors, Leggate writes: “Looking forward we see the pending acquisition of HES reset its investment case, led by visibility on future dividend capacity but also significant opportunities for portfolio high grading: in our view, management’s estimate of ~$15bn of post-acquisition asset sales has significant upside that we expect to include Hess’ Malaysia assets. With the shares having not fully recovered from the Tengiz problems in 3Q23, we continue to view CVX relative investment case with a rate of change in FcF that can support l/term dividend growth and drive market recognition of value.”
Putting all of this into a simple recommendation, the analyst rates CVX stock a Buy, with a $196 price target that implies a one-year upside potential of 25%. (To watch Leggate’s track record, click here)
Overall, Chevron gets a Moderate Buy from the Street’s consensus, based on 15 recent analyst reviews that include 9 Buys and 6 Holds. The shares are priced at $156.62 and their $175.53 average target suggests the stock will gain 12% this year. (See CVX stock forecast)
Occidental Petroleum (OXY)
Next up is Occidental Petroleum, one of the American oil industry’s important independent players. The company boasts a market cap of $55.3 billion, and controls large holdings in important hydrocarbon basins in the US, both onshore and offshore; in North Africa; and in the Middle East. The company also has extensive petrochemicals manufacturing interests, producing a range of vital industrial chemicals such as chlor-alkalis and vinyls.
In an announcement last month, Occidental made it known that it will be reducing its US shale production activities, shutting down two rigs in the Permian Basin of Texas. The move is intended to reduce costs and improve efficiency, in the name of paying down debt. Looking ahead to the end of 2024, the company expects that total oil production for the year will be flat compared with 2023, at 1.25 Mboe/d.
The slowdown should also help the company improve its cash flow, by cutting capex from $7 billion to $6.5 billion. The added cash flow will be used to work down debt incurred in the company’s recent acquisition of CrownRock, an oil and gas firm based in Midland, Texas. The acquisition added substantial oil assets to Occidental’s portfolio, but cost the company up to $10.8 billion in new debt.
Occidental’s production totals recently have been impacted by a third-party pipeline failure in the Gulf of Mexico. The subsea pipeline rupture caused bottlenecks for several firms with offshore production in the area, including approximately 15% of Occidental’s total US oil production. The company was able to offset that loss through stronger results from its onshore holdings in the Rocky Mountains and the Permian Basin.
Occidental’s last quarterly report showed those results: the Q4 output of 1,234 thousand barrels of oil equivalent per day (Mboed) beat the guidance midpoint by 8 Mboed. The company’s earnings came to 74 cents per share by non-GAAP measures, beating the estimates by a nickel per share. The company’s operating cash flow came to $3.2 billion; the quarterly free cash flow was reported at $1.1 billion.
Buffett evidently likes the investment opportunity here. The famed investor increased his existing holding in OXY by 19,586,612 shares in 4Q23. This marked a 9% increase in his stake, which now comprises more than 243.7 million shares of OXY, currently valued at nearly $15.6 billion.
For Bank of America analyst Leggate, the key point here includes the company’s ability to weather its headwinds. He writes of Occidental, “On balance, the headline beat and mixed guide mainly on transitory third-party downtime in the GoM leaves OXY’s outlook rangebound pending the step change in deleveraging capacity we expect with the FcF and debt-funded capital structure of the CrownRock acquisition. In a backward oil curve, we see OXY positioned to transfer value from debt to equity…”
Looking ahead, Leggate puts a Buy rating on OXY shares, and his $80 price target points toward an upside of 26% for the stock.
This is another stock with a Moderate Buy consensus rating from the Street’s analysts. The shares have 15 analyst reviews on file, including 7 Buys and 8 Holds. With an average price target of $67.86 and a trading price of $64.06, OXY’s one-year upside potential stands at 6%. (See OXY stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
