This Warren Buffett stock just hit its lowest price in 2 years. Why don’t they buy more?

Warren Buffett currently has more money than he has good ideas to invest in. Berkshire Hathawayhis (BRK.A -0.34%) (BRK.B -0.96%) cash and treasury holdings could exceed $300 billion by the end of the third quarter. This is driven by Buffett’s recent decisions to sell shares in Berkshire’s stock portfolio without reinvesting the funds in new holdings. Buffett has sold more stocks than he bought in each of the last seven quarters.

This trend is extremely evident these days. Buffett has sold over $7 billion worth Bank of America stock since the beginning of the third quarter. Meanwhile, one of the few stocks it has bought consistently over the past two years is near a two-year low, but it hasn’t bought any additional shares.

In 2019, Berkshire Hathaway paid $10 billion for preferred stock of Occidental Petroleum (OXY -0.75%)including stock purchase warrants at approximately $60 each. Over the past two years, Buffett has consistently bought shares whenever they traded below that $60 price, while letting Occidental retire its preferred stock. But with Occidental shares falling near $50, Buffett has stopped adding to his position.

Buffett said he plans to hold Occidental stock indefinitely in his 2023 letter to shareholders. But he no longer seems interested in acquiring more.

Image source: The Motley Fool.

Why isn’t Buffett buying?

Occidental is much more sensitive to oil prices than other integrated operators. It is heavily focused on extracting oil from bedrock compared to other oil and gas companies, meaning that when the price of oil falls, so do Occidental’s earnings.

Since the start of the third quarter, the price of West Texas Intermediate crude has fallen about 15%. The price fell below $70 a barrel earlier this month before recovering slightly. That’s a big price for Occidental, which said last year’s acquisition of CrownRock would boost free cash flow by $1 billion, based on a $70-a-barrel WTI price.

That deal with CrownRock also left Occidental with a high level of debt on its balance sheet. Management is strategically divesting assets to accelerate debt service. CEO Vicki Hollub expects to reduce the debt on its balance sheet from about $19.7 billion to $15 billion by the end of 2026 or the first quarter of 2027. The company retired $3 billion in debt in the third quarter, putting him on track toward that goal.

But it will be slower from here, needing excess cash flow to get to debt reduction. And with oil prices falling, that cash flow won’t be nearly as much as it was when oil prices were rising in the $80 range.

Hollub’s aggressive maneuvers in the industry show confidence in the recovery of oil prices. And Buffett’s past purchases and praise for Hollub suggest he’s also bullish on long-term oil prices. But the knife cuts both ways and now it hurts Occidental.

Should investors stay away or take the opportunity?

Occidental is one of Buffett’s largest holdings. As noted, he has steadily added to his position in the company over the past two years whenever the stock has been priced below $60. As a result, Berkshire Hathaway now owns approximately 28% of the company’s common stock.

Buffett has said he has no plans to acquire a majority stake in the business and may be satisfied with the current level of investment in the company. With the pressure on Occidental’s cash flow, it’s unlikely to divest as much from its preferred stock for some time, and it receives an 8% dividend on its remaining $8.5 billion investment.

The vast majority of Buffett’s stock was purchased at prices between $55 and $60 per share. With shares currently trading closer to $52, investors are getting about a 10% discount to Buffett’s average price.

Despite the financial challenges for the company outlined above, there are reasons to be optimistic about Occidental. First, its portfolio of assets, particularly in the Permian Basin, gives it an enviable position for its upstream segment. Therefore, it has cheap access to oil, and when oil prices rise higher, this position enjoys strong gains for the business.

In addition, Occidental is investing heavily in carbon capture technology. It recently received a $650 million award from the US Department of Energy to build a direct air capture (DAC) hub in South Texas. Occidental plans to commercialize projects like the DAC Hub with the sale of carbon credits for companies to offset their emissions with some sales already lined up. In the next few decades, carbon sequestration could turn into a multi-trillion dollar industry. Buffett is also optimistic about Western efforts to capture carbon.

At the current price, Occidental shares are trading for an enterprise value to EBITDA ratio of about 5.4. This is a discount to its larger peers. And given the current price of oil and the company’s financial situation, perhaps it should trade at a discount. But investors bullish on oil prices and the long-term prospects of carbon capture may want to take a closer look at Occidental shares at their current price.