This Warren Buffett stock rose 100%! Should I buy?

One of Warren Buffett’s biggest holdings, Western Petroleum (NYSE: OXY ) surged 105% last year, thanks to raging oil prices. While I don’t think that feat can be replicated this year, there is still room for growth. Therefore, I will explore whether there is a position in my portfolio.

Gold barrels of cash

On the back of strong oil prices, Occidental’s profits are expected to grow by 79% by 2022. This has led to a 3,500% increase in net income to $3.76bn at a time when oil prices are at their peak.

This allows the Warren Buffett fund, Berkshire Hathawayto prevent losses from other sectors such as technology – therefore it can beat S&P 500 last year. However, past performance is not an indicator of future performance. So, I will explore whether the strong momentum will remain in 2023.

China to exceed Western pressure?

Sky-high inflation paired with rapidly rising interest rates all set alarm bells ringing during a recession, especially in Western countries. So, oil prices started to fall drastically to the 2021 level in the last few months.

This has caused fear among oil investors, as there is less risk involved. However, Wall Street is not swayed by the noise, and neither is Warren Buffett, for a number of reasons.

For one thing, the gradual opening of China’s economy should provide support for oil prices in the medium term. Moreover, recession forecasts across Europe and the US suggest that it will be shallow. This means that the demand for commodities and oil should remain at a reasonable level. Consequently, analysts predict that oil prices will remain strong this year, with some even calling for a rally.

Having said that, it should be noted that Occidental’s stock is highly dependent on oil prices, but it also has other revenue streams such as liquefied natural gas (LNG). With natural gas prices remaining elevated in Europe and the US, I expect Warren Buffett’s investments to perform well despite the potential drop in oil prices.

Explore new revenue streams

So, is Occidental stock worth buying for me? Currently, it trades at a relatively low price-to-earnings (P/E) ratio of 5. This is lower than many of its peers and the broader market. And given the bullish sentiment about future earnings for the conglomerate, it also trades at a relatively low P/E of 6.

Having said that, while the debt-to-equity ratio is reasonable, cash and equivalents do not cover it. This is something I take note of. Even so, the company is reducing its debt pile while generating value for shareholders, which is Warren Buffett’s hallmark when it comes to investing.

The stock has an average ‘hold’ rating with an average price target of $75. This suggests that the one-year outlook for the stock is not very bright. However, the Oracle of Omaha would not have voted to buy up to 50% of Occidental’s outstanding shares if it did not believe in the explorer’s long-term potential.

After all, Oxy’s new investment into carbon capture technology should be able to benefit from the transition to a greener form of energy. For that reason, I may be inclined to start small positions when I make more money.