Warren Buffett Was Right: These Oil Stocks Are the Safest Bet in an Iran-Rattled Market
Key Points
Warren Buffett made Chevron and Occidental Petroleum two of Berkshire's 10 largest holdings.
Both oil giants can thrive at much lower oil prices.
They're really cashing in this year now that crude prices have surged.
Warren Buffett made a bold bet on a couple of oil stocks before he retired as Berkshire Hathaway's (NYSE: BRKA)(NYSE: BRKB) CEO earlier this year. His company bought nearly 27% of Occidental Petroleum's (NYSE: OXY) outstanding shares and built a 6.5% stake in oil giant Chevron (NYSE: CVX), making them Berkshire's sixth- and fourth-largest holdings, respectively. Those moves have paid off this year as crude prices skyrocketed due to the war with Iran.
Here's a look at why these top oil stocks remain a safe bet in today's Iran-rattled market.
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Repositioned to thrive at lower oil prices
Occidental has spent the past several years building a larger-scale, more focused oil company, thanks in part to Berkshire's help. Buffett's company helped Occidental fund its $38 billion acquisition of Anadarko Petroleum in 2019 through a preferred stock investment, enabling it to beat out a rival offer from Chevron. Occidental also acquired CrownRock for $12 billion in 2024. While those deals saddled Occidental with a lot of debt, it has steadily whittled down its borrowings by generating free cash flow and selling assets, including selling OxyChem to Berkshire for $9.7 billion earlier this year.
As a result, Occidental can thrive at lower oil prices. It was on track to generate $1.2 billion of additional free cash flow this year without any increase in oil prices. Meanwhile, with crude oil soaring this year, Occidental will produce an even bigger free cash flow gusher, giving it additional funds to repay debt, repurchase stock, and eventually redeem Berkshire's preferred stock investment.
The perfect time to hit an inflection point
Chevron has also spent the past few years upgrading its portfolio. It sold off several lower-margin assets and has invested heavily in developing and acquiring higher-margin assets. The oil giant completed several major growth capital projects last year and closed its $55 billion acquisition of Hess.
As a result, Chevron expected to generate $12.5 billion of incremental free cash flow this year at $70 oil. With oil prices now much higher, it can produce an even bigger free cash flow gusher. The oil company can use those funds to further fortify its elite balance sheet and repurchase shares toward the top end of its $10 billion to $20 billion target range.
Chevron's strategy of investing in low-cost, high-margin assets will really pay off in the coming years. It can generate enough cash to fund its capital program and dividend at sub-$50 oil. As a result, it can produce substantial free cash flow at higher prices. For example, it can grow its free cash flow at a more than 10% annual rate if crude averages $70 a barrel through 2030.
Top-tier oil stocks
Occidental Petroleum and Chevron both expected to generate meaningfully more free cash flow this year without any increase in crude prices. They're now on track to produce even bigger gushers now that prices are much higher. Their ability to thrive at lower oil prices shows that Buffett was right that they were safe bets to add to Berkshire's portfolio.
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Matt DiLallo has positions in Berkshire Hathaway and Chevron. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
