Shares of Buffett holding Occidental Petroleum (OXY 6.22%) rallied 6.2% in Thursday trading.
Occidental reported earnings last night, with mixed results. However, investors focused on the profit metric, as Occidental displayed resilient production metrics with more efficient costs. Furthermore, and perhaps even more meaningful than the earnings report, oil stocks were generally up, as the administration announced a trade deal with the U.K. today, spurring optimism that a global tariff-induced recession may be avoided.
Occidental does more with less
In the first quarter, Occidental reported revenue of $6.8 billion, up 13.7% year over year, and $0.87 in adjusted (non-GAAP) earnings per share (EPS). While the top line slightly missed, investors apparently took comfort in the solid bottom line, which beat expectations by a solid $0.11.
One can thank Occidental’s technology chops for more efficiently turning profits, even in a lower oil price environment. In the company’s presentation, management noted a 17% improvement in drilling duration per well in the Permian Basin, resulting in 18% lower costs per well. Management also divulged that as a result of efficiencies, it was reducing its Permian rig count by two, and also said it was lowering combined operating and capital expenditures by $350 million this year, with only “minimal” impact to production.
Of note, it was Occidental’s huge, low-cost inventory in the Permian along with its commitment to technology enabling lower costs that drew Buffett to invest in the stock.
The lower costs were music to investors’ ears, who have worried about profitability in the wake of President Donald Trump’s tariff announcements. Since April 2, the price of oil has plunged as recession odds have increased.
However, there was also optimism over tariff and trade negotiations today, as Trump announced the administration’s first trade deal, made with the U.K. In a press conference announcing the deal, Trump also said other deals were close to coming to fruition, and that this weekend’s initiation of trade talks with China would be “very substantive,” saying the current tariff on China “can’t go any higher.”
In response to the trade deal optimism, the price of oil rose 3.3%. That being said, today’s oil price is still a hair below $60 per barrel. In the first quarter, Occidental realized an average price of $71.07.
Image source: Getty Images.
Occidental has been a Buffett laggard
The current share price of Occidental is lower than Buffett’s average price, so investors may realize an opportunity if Buffett turns out to be right on the name. That being said, it’s still looking like oil and gas stocks may struggle this year.
After all, even if trade deals are struck, the universal 10% tariff on most countries will stick and is new this year, which could slow economic activity. Add in the fact that OPEC+ just increased its production quota two days ago, and the global oil industry appears on the verge of a price war.
That being said, Occidental appears to be one of the most efficient U.S. producers with lots of reserves in the Permian Basin. So, it should remain a strong house, but perhaps on a bad block, in 2025.
Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.