Warren Buffett has always been a contrarian investor. His company, Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B), routinely buys stocks of companies in unloved industries or out-of-the-way locations.
Take, for example, Berkshire's growing investment in oil stocks. Berkshire has built sizable positions in oil giants Chevron(NYSE: CVX) and Occidental Petroleum(NYSE: OXY). Given their upcoming catalysts, these top Buffett stocks look like great buys this June.
Strong growth with a big upside catalyst
Berkshire Hathaway owns nearly 123 million shares of Chevron worth over $19 billion. That makes the oil giant its fifth-largest holding at 6.6% of its investment portfolio.
On the one hand, Chevron's stock has underwhelmed over the past year. It has underperformed the S&P 500 and other energy stocks, including ExxonMobil. A big driver is investor concern about its megadeal to acquire Hess. That's after Exxon claimed it has the right of first refusal on Hess' 30% stake in their joint venture to develop the oil-rich Stabroek Block offshore Guyana. Chevron doesn't believe ExxonMobil's claim has any merit.
Hess shareholders recently approved the $53 billion all-stock deal. However, Chevron can't close the transaction until it settles its arbitration case with ExxonMobil, which might not occur until next year.
Acquiring Hess would enhance Chevron's already robust growth profile. The oil giant can grow its free cash flow by more than 10% annually through 2027, assuming oil averages around $60 a barrel (crude is currently around $80). Buying Hess would enable Chevron to double its free cash flow by 2027, assuming oil is around $70 a barrel. The deal would also extend its production and free cash flow growth outlook into the 2030s.
Beating ExxonMobil in the arbitration hearing would boost Chevron's stock. However, even if it lost (and had to abandon its deal for Hess), Chevron would be just fine. The company expects to generate a growing stream of free cash flow. It plans to return a sizable portion of that money to shareholders through a meaningful share repurchase program (it can retire 3% to 6% of its outstanding shares each year at $60 to $70 oil) and continue growing its high-yielding dividend (over 4% yield), which it has increased at a peer-leading rate over the past five years.
Multiple growth catalysts
Berkshire Hathaway owns over 248 million shares of Occidental Petroleum (28% of its shares outstanding) worth over $15 billion. That puts it right behind Chevron as its sixth-largest holding at 4.1% of its investment portfolio.
Occidental is also working on a needle-moving deal to enhance its growth rate. It agreed to buy CrownRock for $12 billion in cash and stock last year. The company expects that the acquisition will boost its annual free cash flow by $1 billion (assuming oil averages around $70 a barrel). That needle-moving deal helped support the company's decision to raise its dividend by 22% earlier this year.
In addition to increasing its free cash flow, CrownRock will enhance Occidental's portfolio. It will add about 170,000 barrels of oil equivalent per day in high-margin production and 1,700 low-cost future drilling locations. That will free Occidental up to sell $4.5 billion to $6 billion of non-core assets.
On top of CrownRock, Occidental Petroleum has several other growth drivers. The company expects to increase its free cash flow from non-oil sources by $1 billion by 2026. Catalysts include higher cash distributions from its investment in Western Midstream, contract expirations at its midstream business, falling interest expenses as it repays debt, and investments to grow its chemicals business (OxyChem). Meanwhile, Occidental continues to invest in organically increasing its oil and gas production by drilling new wells, which should grow its oil-fueled cash flows if crude prices cooperate.
Occidental's growing free cash flow will give it the money to repay debt, increase its dividend, and repurchase equity (including preferred stock owned by Berkshire). Debt repayment and preferred stock repurchases will transfer more value to common shareholders. Add in growing cash returns to common shareholders, and Occidental could have the fuel to produce strong returns in the coming years.
Buffett's contrarian bet on oil stocks could pay big dividends
Warren Buffett invested a lot of money in Chevron and Occidental. They have strong businesses that generate lots of free cash flow. Meanwhile, they have strong upside catalysts. Those drivers could give these oil stocks the fuel to produce strong total returns in the future, making them great Buffett stocks to buy this month.
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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.
