Warren Buffett has been reducing Berkshire Hathaway’s stock portfolio lately. But there are a few stocks the Oracle of Omaha has been buying.

One of these is Occidental Petroleum (NYSE:OXY). And with the share price falling, it’s worth asking what Buffett sees in the US oil producer.

Why Occidental?

Buffett has mentioned Occidental’s presence in the Permian Basin. The advantage of this is that it’s the cheapest source of oil in the US, but a couple of things are worth noting.

One is that oil wells in the area decline relatively quickly, meaning production from them has a relatively short life. That’s a drawback compared to some other geographies.

The other is that Occidental isn’t the only firm with substantial assets in the Permian. ExxonMobil also operates there, but Buffett hasn’t shown any interest in that stock recently.

As a result, I think Buffett’s focus on Occidental is about more than just the quality of its assets. And there are a couple of other things that stand out. 

Potential

One thing that looks attractive to me is the possibility of future earnings growth. The CFO’s comments back in February illustrated a few potential sources.

The first is lower transportation rates between the Permian and the Gulf Coast. In 2025, Occidental expects to save between $120m and $160m, and roughly twice this from 2026.

Another is a reduction in the firm’s debt. Acquiring Anadarko in 2019 caused the company to take on significant debt and reducing this should increase earning power. 

This potential for future growth in cash flows is the kind of thing I think Buffett might be interested in. But there’s something that might be even more important. 

Costs

Compared to other oil companies, Occidental invests relatively little in exploration projects. Rather than speculative drilling, it prefers to grow through acquisitions. 

The Anadarko deal is an example of this. This deal didn’t work out as well as anticipated, but part of this can be attributed to oil demand falling sharply during the pandemic. 

Occidental has also acquired Crown Rock, further boosting its position in the Permian. This should help offset the effect of its existing wells depleting relatively quickly.

Capital-intensive exploration projects with uncertain returns can be a risky use of cash. So the company’s strategy of avoiding this might be part of Buffett’s interest in the stock.

Investing in oil

Claiming to know exactly what an investor as sophisticated as Buffett is thinking is bold, to say the least. But looking closely at what the Berkshire CEO is buying can be interesting. 

It seems clear that something sets Occidental apart from the other US oil majors. Exactly what that is might be hard to judge, but there are a couple of possibilities. 

As I see it, one is the potential for future earnings growth. This comes from things like reduced transportation rates and a stronger balance sheet.

Another is the way the company is run. Focusing on growth through acquisition, instead of financing speculative projects, marks a clear difference between Occidental and its rivals.