The concern with Occidental Petroleum (NYSE:OXY) is, will you have a seat after the game is over? Meanwhile, the greater question for Warren Buffett is why Occidental Petroleum was not a buy at $10 but is now purchased at several times the price. What has changed so drastically that Occidental is now inexpensive at a considerably higher price? However, the musical chairs’ audience may be uninterested in the subject. They are more enthusiastic about the game and its hypothetical potential. While the music is playing, there are several theories on how to win big on this one.
Occidental Petroleum’s stock price performance is even stronger when compared to the nadir of the fiscal year 2020. This should not be happening in the context of market efficiency and complete information. One person’s choice to buy stock in a firm has no substantial impact on the company’s prospects.
Furthermore, an agreement allowing a big shareholder to buy up to 50% of the existing Occidental Petroleums shares is an agreement. There is no guarantee that any further shares will be acquired, and there is always the possibility that no additional shares will be purchased beginning tomorrow. If the purchase does not result in a total acquisition of the firm, what is the company worth in the eyes of the market?
Occidental Petroleum Finances
Occidental is a business that has a lot going for it. However, most energy businesses in this sector appear to be in better shape than they have been since at least 2014. The consequences of low oil prices on the future balance of supply and demand were one of the things that the market definitely “never saw coming” back in the fiscal year 2020. To be sure, the war exacerbated the issue. But, as I covered the business, so many executives were apprehensive about the future that they hedged at what turned out to be very cheap costs in comparison to what transpired.
Demand “snapped back” in so many areas, including oil and gas, that the globe was caught off guard. We had never seen a pandemic before and had no clue how the recovery would go. So, in fiscal years 2020 and 2021, the issue was maneuvered as well as anybody could. All of those executives who hedged output were concerned about a slow recovery or one that would require “two steps back for every stride ahead.”
More crucially, the unconventional sector is notorious for wells with a high first-year production decrease and a large second-year decline. When this is paired with rising demand due to the epidemic (which appears to have happened), a significant imbalance between supply and demand arises. Replacement products did not offset those decreases in the fiscal year 2020. As a result, one of the largest industry-wide output reductions on record occurred.
Rapid expansion, a significant indicator of the unorthodox business, had suddenly become a thing of the past. Once the previous balance-sheet repairs are completed, more money will be spent on future growth and shareholder rewards. However, poor lending practices that occurred in the past are unlikely to occur again. Because of previous losses, inexperienced “quick buck” money also looks to be keeping away. As a result, everything will be better organized in the future.
As is customary, the market misjudged the strength of the industry’s rebound. That means the company’s second-quarter performance will likely be replicated. The only sources of finance and debt are those well-versed in the sector. As a result, the unconventional business is more likely to act like an established sector than a new fast-growing notion for the “get rich quick” crowd in the future.
The Future
Warren Buffett most certainly sees a very lucrative corporation that can use current commodities prices to reset its balance sheet. Unlike economic theory, information is rarely flawless. It is much less common in this business to be available far into the future. Instead, “group-think” is a common investing risk.
Investors should remember that Warren Buffett is a large investor who frequently makes large acquisitions for such purchases to significantly impact the returns he delivers to shareholders. When he is finished purchasing (assuming he does not acquire the entire firm), the market will determine a future valuation for Occidental Petroleum.
For the time being, the current price looks reasonable for prospective investors to examine. However, a price pullback is possible if a significant stakeholder ceases to buy the stock. Warren Buffett frequently has a long time horizon. Mr. Market may have a dozen “fits of concern” between now and then, shaking individual investors to their core. Thus, individual investors should have a comprehensive strategy before investing in Occidental Petroleum.
Warren Buffett’s odds of ever selling are limited. However, suppose any of my friends are indicators. In that case, they can be persuaded out of their investment position before making a fair return since the stock abruptly fell. That “talking out of” aspect needs to be avoided before you get in since it frequently depletes investors’ portfolios of excellent long-term returns.
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