Indeed, the energy landscape is undergoing a significant transformation driven by evolving public policy and mounting social pressures to embrace renewable energy sources. While renewables are gaining momentum, they currently cannot fully replace conventional energy sources, leaving oil and gas as essential components of the global energy mix. As a result, there is a growing sentiment that an energy boom may already be underway, with oil and gas poised to benefit from sustained increases in demand.
In the United States, oil production has reached unprecedented levels, with producers extracting an average of 12.9 million barrels per day in 2023, setting a new world record. This output surpasses that of major oil-producing nations like Russia and Saudi Arabia by approximately 3 million barrels per day. The combination of robust demand and record production levels underscores the resilience of the oil and gas industry.
Investment icon Warren Buffett has taken notice of this trend and has been strategically increasing his exposure to oil plays in the Permian Basin, a prolific oil-producing region in Texas. Two leading Texas-based oil producers have emerged as prominent holdings in Buffett’s portfolio, signaling his confidence in the sector’s growth prospects. Buffett’s moves reflect a bullish outlook on the long-term viability of oil and gas investments, despite the push for renewable energy alternatives.
Doug Leggate, a top-rated analyst at Bank of America, shares Buffett’s optimism and has conducted a detailed analysis of the companies in which Buffett has invested. Leggate is particularly impressed by these companies’ capabilities to expand production, highlighting their strong fundamentals and growth potential in the evolving energy landscape. With Buffett and Leggate both expressing confidence in the future of Big Oil, investors are paying close attention to the opportunities presented by the sector.
Chevron (CVX)
Chevron Corporation, a major player in the global oil industry, stands as the world’s third-largest oil company by market capitalization, valued at $288.6 billion, and ranks eighth in terms of annual revenue, generating $196.9 billion in 2023. The company’s extensive operations encompass the exploration and production of oil and natural gas, large-scale refining of crude oil, hydrocarbon product transportation, and maritime shipping services. Chevron is also a significant player in the petrochemical sector, offering fuels, lubricants, and additives distributed through its widespread network of Chevron-branded gas stations.
In recent months, Chevron has made headlines with two notable developments. Firstly, the company announced its agreement to acquire Hess Corporation, a prominent exploration and production company, in a deal valued at $60 billion in stock and debt assumption. This transaction, expected to close in the first half of 2024, has encountered legal challenges from Exxon Mobil due to Hess’s stake in certain Guyana oil assets, subject to arbitration. Secondly, Chevron reaffirmed its substantial interest in Kazakhstan’s Tengiz oil field, where it holds a 50% stake through Tengizchevroil (TCO). Despite the field’s massive reserves, estimated at up to 25.5 billion barrels of recoverable oil, project start-up costs are projected to be approximately $48.5 billion, slightly higher than previous estimates.
In terms of financial performance, Chevron reported $47.2 billion in revenue for Q4 2023, down 16.5% year-over-year but exceeding earnings expectations with a non-GAAP EPS of $3.45. Additionally, the company announced an 8% increase in its common share dividend, reaching $1.63 per share, reflecting its commitment to shareholder returns. Berkshire Hathaway, led by Warren Buffett, has shown confidence in Chevron’s prospects by acquiring a substantial stake in the company, making it the fifth-largest holding in its portfolio.
Bank of America analyst Doug Leggate views Chevron favorably, citing its pending acquisition of Hess and potential asset sales post-acquisition as key drivers of future dividend capacity and portfolio optimization. Despite challenges related to the Tengiz project, Leggate believes that Chevron’s strong free cash flow trajectory supports long-term dividend growth and undervalued market recognition. As a result, Leggate rates Chevron stock as a Buy with a price target of $196, implying a 25% upside potential.
Occidental Petroleum (OXY)
Occidental Petroleum, a significant player in the American oil industry, is characterized by its $55.3 billion market capitalization and extensive hydrocarbon holdings in key regions worldwide. The company’s diversified portfolio includes assets in the US, North Africa, and the Middle East, as well as petrochemical manufacturing interests.
In a recent announcement, Occidental revealed plans to scale back its US shale production operations by decommissioning two rigs in the Permian Basin of Texas. This strategic move aims to enhance cost efficiency and reduce debt burdens. Looking ahead, Occidental anticipates maintaining flat total oil production for 2024 compared to the previous year, at 1.25 million barrels of oil equivalent per day (Mboe/d).
The reduction in shale production is expected to bolster cash flow by trimming capital expenditures from $7 billion to $6.5 billion. The additional cash flow will be directed towards debt repayment, stemming from Occidental’s acquisition of CrownRock, a Texas-based oil and gas company. While this acquisition expanded Occidental’s oil assets, it also added substantial debt totaling up to $10.8 billion.
Occidental’s production figures were impacted by a pipeline failure in the Gulf of Mexico, resulting in bottlenecks affecting approximately 15% of its total US oil production. Despite this setback, the company managed to mitigate losses through stronger performance in its onshore holdings.
In its latest quarterly report, Occidental exceeded expectations with a production output of 1,234 Mboed, beating guidance by 8 Mboed. Earnings per share stood at 74 cents by non-GAAP measures, surpassing estimates by five cents per share. Operating cash flow reached $3.2 billion, with quarterly free cash flow reported at $1.1 billion.
Warren Buffett demonstrated confidence in Occidental by increasing his stake in the company by 9% in the fourth quarter of 2023. His holdings now comprise over 243.7 million shares, valued at nearly $15.6 billion.
Bank of America analyst Doug Leggate sees Occidental’s resilience in the face of challenges as a key factor. He maintains a Buy rating on OXY shares, with a price target of $80, implying a 26% upside potential.
Occidental Petroleum garners a Moderate Buy consensus rating from analysts, based on 15 reviews, including 7 Buy and 8 Hold recommendations. With an average price target of $67.86 and a current trading price of $64.06, the stock has a one-year upside potential of 6%.