Hey Traders,
While the headlines over the last few weeks have been the banks stocks – and rightfully so – underneath the ugliness of the banks there has been another hard-hit sector…
Energy…
Take a look at a chart of XLE:
While off the lows, it is still below where it was in mid february.
XOP is not any better:
Believe it or not, a good number of these companies are interest rate-sensitive … more importantly they are economically sensitive, as oil falls when the economy falters.
Within this group there is one that, relative to its size, garners a lot of attention …
Occidental Petroleum
The Good
Warren Buffett – he wants to own a good chunk of it…
Here is why he likes it …
With a market cap of $53 billion, this is a big-but-not-huge company. It’s a company that produces massive cash flow …$19.35 per share, with an EPS of 12.42. That is good for a PE ratio of 4.75…
It pays a nice dividend of .52 and has revenue of 36.63 a share.
Those are all solid numbers.
But the best part about the stock is its underlying bid.
Right now it appears that Warren will buy the stock when it gets much below 57, which creates a natural floor.
If oil is going to remain above 60 bucks a barrel, and it appears that it is, OXY is in a very favorable position.
The Bad:
Debt. OXY has a debt-to-equity ratio of over 60%. That is high.
They have a lot of debt to service.
That’s easy if oil does remain above 60. However, what if we really do hit a bad recession? That debt becomes much harder to service…
All those pretty numbers I just went through start to look less good.
Suppose Mr. Buffett changes course – or worse, dies (heaven forbid) … and the people that have been working for him change their tune.
That would be a problem.
In addition, Mr. Buffett is known for his long game, not his timing.
If he buys a bunch and the stock sinks because oil is falling, he could easily decide to hold back on buying…
This is by no means a slam dunk.
The Verdict:
Below $60 a share, this is worth a buy.
Above $70, it becomes less attractive as there is far more downside risk.
On the next dip toward $57 II will be looking to scoop and then start a covered call program once it reaches $65 a share.
Mark Sebastian