With Buffett Selling Occidental Stock, Other Investors Probably Will Follow

The stock market is hitting new all-time highs. However, the energy sector is not making similar moves. In fact, most oil and gas names are slumping again. Occidental (NYSE:OXY) is part of the group of laggards. OXY stock popped back up to $25 in June on hopes of economic recovery. Since June, however, Occidental has lost 50% of its remaining value, and overall, the stock is off 68% year-to-date.

A magnifying glass zooms in on the Occidental Petroleum (OXY) website.

Source: Pavel Kapysh / Shutterstock.com

That makes Occidental one of the worst performers in the S&P 500 for the year, and there’s been pain in other ways as well. The company slashed the formerly generous dividend.

It has phased out planned expansion efforts, and now Occidental is selling off assets at seemingly low prices to attack its debt load. It all looks like a company in a downward spiral. So is there any turnaround potential for OXY stock?

Huge Debt Load and OXY Stock

The crux of the problem for Occidental is that it faces around $13 billion in debt that will come due over the next five years. More broadly, it had $36 billion in long-term debt as of last quarter, though investors are rightfully more concerned about the debt maturities coming up within the next few years.

Given the dreadful conditions in the energy market, some analysts are skeptical that Occidental will be able to roll over its debt on favorable terms.

Occidental is making progress. For example, it just announced an asset sale of lands located primarily in Wyoming. It will be receiving $1.33 billion in return for selling off a large land package.

Unfortunately, this was an asset that generated substantial cash flows, and thus this sale at a price below expectations may be a net negative for the company in the bigger picture. However, Occidental needs cash now rather than profits in the future, and $1.33 billion is certainly a nice chunk of liquidity.

Berkshire Sells Out

Occidental has lost one key element that it used to have: Berkshire-Hathaway’s (NYSE:BRK.A) (NYSE:BRK.B) exclusive support. Last year, you may recall, Berkshire invested many billions into Occidental preferred stock to help support Occidental’s gargantuan takeover of Anadarko. Subsequent to that, Berkshire acquired common OXY stock as well.

This year, however, Berkshire sold out of its Occidental common stock position at far lower prices, locking in a stinging loss. This should be dispiriting to Occidental shareholders for several reasons.

One, it indicates that even at far lower prices, Warren Buffett & Company no longer view OXY stock as an attractive position.

Two, Berkshire has been taking its dividend payments on its Occidental preferred stock in the form of Occidental common stock rather than cash. This means that, going forward, Berkshire is likely to receive more shares of OXY stock which it will then sell directly into the market, causing the stock price to slide.

At the same time, Berkshire has taken positions in other natural resources. It’s branched out within the energy sector, establishing a stake in Canadian oil sands and refining company Suncor (NYSE:SU).

This past quarter, Berkshire also took a starter position in global gold mining firm Barrick (NYSE:GOLD). Investors who own Occidental due to Berkshire’s past involvement will likely sell their holdings in coming months, putting further pressure on the stock price.

OXY Stock Verdict

While Occidental’s stock price has been volatile this summer, not much has changed fundamentally since oil crashed back in March. The company made a bad deal buying Anadarko. In overpaying, it loaded up its balance sheet with debt. Once oil plummeted, Occidental ended up trapped with a huge debt load and insufficient cash flow.

Occidental is trying to shore up the balance sheet. Moves such as slashing the dividend have helped. Still, the main lever – asset sales – will be hard to achieve given global energy markets right now.

It’s great that Occidental wants to sell off assets, but who is going to buy things at a fair price? The $1.33 billion sale is something, but there’s much more to be done. With $55 billion spent for Anadarko, Occidental mortgaged its future. It’s now faced with a series of unenviable options as it tries to find some path forward.

Occidental’s situation isn’t hopeless. However, it really needs higher oil prices for things to turn around – they’ll have trouble gaining any traction if oil stays down at $40/barrel. Meanwhile, with Berkshire dumping OXY stock and dividend investors bailing out as well, there are plenty of reasons for Occidental stock to remain under pressure in coming months.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned BRK.B and SU stock.

Article printed from InvestorPlace Media, https://investorplace.com/2020/08/buffett-selling-oxy-stock-investors-probably-follow/.

©2021 InvestorPlace Media, LLC