Chevron/Occidental: 2 Warren Buffett Stocks For Inflation Surge (CVX) (OXY)

Maria Shriver"s 2008 Women"s Conference

Michael Buckner

The latest inflation numbers were recently released just (July 13th). These numbers show the annual inflation rate accelerated to 9.1% in June 2022, which is the highest level since 1981. In addition, this 9.1% rate is higher than the 8.6% rate seen in May 2022 and higher than the 8.8% Dow Jones forecast. These inflation numbers are based on the Consumer Price Index (CPI), which is a basket of everyday goods that is tracked for price changes.

US Inflation Rate (<a href='https://seekingalpha.com/symbol/CPI' title='IndexIQ ETF Trust - IQ Real Return ETF'>CPI</a>) Inc Food and Energy

US Inflation Rate (CPI) Inc Food and Energy (Trading Economics)

If we break down the CPI into its parts, it’s clear to see the biggest rises are in energy which is up 41.6% YoY, driven mainly by gasoline prices up 59.9%. In addition to fuel oil is up 98.5% and natural gas is up 38.4%.

US Energy Price Inflation % YoY

US Energy Price Inflation % YoY (Trading Economics)

These price increases have been exasperated by the ongoing Russia-Ukraine war. However, more worryingly it’s not just energy prices which have risen. Food costs jumped by 10.4%, the highest level since 1981. If we exclude food and energy prices the core CPI popped by 5.9%, which was higher than the 5.7% estimate. The only glimmer of hope is that core inflation looks to have peaked in March at 6.5% and has been slowly declining.

To stop this freight train that is growing inflation, the Fed is expected to have to slam on the breaks with higher rates.

In the words of Warren Buffett at the Berkshire Hathaway (BRK.A) (BRK.B) annual meeting 2022:

“Inflation swindles the person who keeps their cash under their mattress. It swindles almost everybody.”

Thus to help prevent you from being “swindled” let’s dive into two dividend oil stocks Warren Buffett has been buying, to help protect your portfolio from surging energy inflation.

1. Occidental Petroleum (NYSE:OXY)

Warren Buffett has been loading up on shares of Occidental Petroleum very recently. Late Wednesday (July 13th) it was disclosed that Buffett bought 4.3 million more shares. Berkshire Hathaway is now the largest shareholder in Occidental Petroleum, with a 19.2% stake.

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Data by YCharts

Occidental is an oil and gas exploration company and thus an ideal company to play the surge in oil prices. The company’s business is split into three segments: Oil & Gas, Chemical and Midstream.

OXY has global operations across the US, Middle East and North Africa. It offers a mix of short and long cycle supplies which gives diversification to its operations. “Long cycle” consists of large well capitalized operations which have been producing oil for many years. At Berkshire’s shareholder meeting in 2022, Buffett mentioned investing into companies with “low capital requirements” was a great idea during periods of inflation. Long cycle operations tend to require minimal extra capex, as they were built out many years prior.

Occidental also has a diversified operation with its “OxyChem” business. This manufactures basic chemicals and vinyls. The company’s midstream segments enable value to be captured at multiple parts of the value chain, which includes storage and transportation.

OXY produced strong earnings for the first quarter of 2022, with Oil & Gas pre-tax income of $2.9 billion, up a rapid 38% year over year. The Chemical segment also showed strong results, generating $671 million in income during the first quarter, which beat guidance of $600 million.

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Data by YCharts

Earnings per diluted share popped to $4.65, which were up substantially from the -$0.37 generated in the prior year. Occidental’s cash flow has been extremely strong with a 20% cash flow yield. Cash flow from operations was $3.2 billion, up a blistering 255% year over year. Management has been consistently deploying this capital to pay down debt.

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Data by YCharts

Occidental has a low but stable, growing and consistent dividend yield of 0.9%, which means it’s great for risk averse income investors.

Occidental

Occidental Dividend (Seeking Alpha)

The company trades at a Price to Cash Flow (forward) ratio of just 2.97, which is 23% below the median for the energy sector of 3.87. In addition, the Price to Free Cash flow ratio is 42% lower than its 5 year average. As an extra data point Warren Buffett has been buying the stock most recently at an average price between $55/share and $58/share.

Valuation OXY

Valuation OXY (Seeking Alpha)

2. Chevron (NYSE:CVX)

Chevron is the 2nd “Buffett stock” which is another great inflation hedge against the rising oil prices. Berkshire Hathaway was adding to its position in the first quarter of 2021 at an average price of $143/share, which writing.

The stock price tends to correlate very well with the price, dropping to a low of just $5/share when oil prices went negative before increasing to over $20/share when oil prices surpassed $100/barrel.

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Data by YCharts

Chevron’s global net oil production in the first quarter averaged 3.06 million barrels per day. Its Permian Basin Production grew to a record 692,000 barrels and management has raised its guidance to 700,000 to 750,000 barrels per day on an optimistic outlook.

A key metric when assessing the quality of any oil company is its breakeven oil price. This is the price oil needs to be for the company to “break even” after production costs. In Chevron’s case, its breakeven price is $50, which even includes the current dividend of 4.12%. Thus, if oil prices crashed down from the ~$100/barrel to $50/barrel, the company will still “break even” and be able to cover its dividend. In a scenario, where oil prices drop below $40/barrel, the company can use debt or the $11.7 billion in cash and short term investments on its balance sheet to cover the dividend. With Brent Oil price at $75+, Chevron aims to buy back approximately 25% of its shares which is great news for shareholders.

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Data by YCharts

Free cash flow per share increased to $3.15 in Q122, up a blistering 146% from the $1.28 generated in Q121.

Chevron increased its capital expenditures to $2.8 billion during the quarter, up 10% year over year, as the company invests into legacy oil and renewable energy business lines. Management is expecting capital expenditures and acquisition costs for the full year 2022 to be over 50% higher than in 2021. In Q122, the company announced plans to acquire Renewable Energy Group to help grow its renewable fuels business.

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Data by YCharts

In terms of Valuation, Chevron trades at an EV to EBITDA (FWD) ratio = 4.49, which is 20% cheaper than the energy sector median. In addition, its EV to EBITDA (FWD) ratio is also 37% cheaper than its 5 year average of 7. Again, Warren Buffett’s most recent average buy price is $143/share, which means the stock is ~6% cheaper at $133/share, where it trades at the time of writing.

Chevron

Chevron Valuation (Seeking Alpha)

Risks

Oil Price correction and Renewable Energy

Oil prices went negative during the travel lockdown of 2020 and now we are seeing a major boom with prices close to $100/barrel. However, let’s not overlook the long-term secular trend towards renewable energy and companies increasing focus on ESG policy and Carbon Capture.

The Biden administration wishes for 50% of new cars to be electric by 2030 and has announced an astonishing $7.5 billion towards EV charging infrastructure. The good news is Chevron’s management sees this as a priority, and it is investing into renewable energy products and aims to be the “most carbon efficient producer”.

“Higher returns, lower carbon. We must deliver both.” – Chevron CEO 2022

Final Thoughts

Warren Buffett is one of the greatest investors of all time, he has generated 20% returns for the past 57 years and has lived through multiple high inflation periods such as the 1970s. Berkshire Hathaway has been buying these two oil stock “hand over fist” especially Occidental, thus it’s clear the Oracle of Omaha has confidence. However, as an independent investor, I like to do my own research and as I’ve outlined in the prior article, these stocks have flowing financials, which act as a strong inflation hedge against surging oil prices.

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