Market momentum is Red. However, on Thursday, we saw capital trickle into inflationary plays like utilities and real estate. So be patient as the markets experience low volumes, and we speculate around short squeezes over the next few trading sessions.
While energy stocks are in a negative momentum channel, Warren Buffett is getting to work. The “Oracle of Omaha” bought more than $500 million in Occidental Petroleum (OXY) stock. This brings the stake of his company, Berkshire Hathaway (BRK.B), to more than 16%.
In addition, Buffett’s firm owns options to potentially purchase up to 25% of the stock. Now, investors are looking for a bottom on Occidental. And the more I dig, the more likely I am to try to enter this stock at a much lower price. As chatter fills the air about Buffett’s involvement, some Wall Street analysts are getting even more aggressive on their outlook for OXY stock.
Truist Upgrades OXY
A report from Truist analyst Neal Dingmann suggests that OXY stock could hit $93 per share. The argument goes that Occidental stock could receive a bid from Berkshire Hathaway should the energy firm reach “investment grade.” The oil giant would need to pay off more of its debt – hopefully down to a range of about $15 billion.
Dingmann suggests that it could accomplish this task in the year ahead.
It’s important to remember that Occidental is part of a class of energy stocks that aren’t expanding production this year. Instead, they’ve been increasing dividends, buying back some stock, and paying down their debt. This is a dream for investors as the company continues to clean up its balance sheet and reward its investors for their patience.
In 2014, most energy producers expanded production when oil prices topped $100 per barrel. Following a collapse of prices in the years ahead, many investors demanded that companies return more capital to them in the future.
Now that the energy sector is facing a dramatic supply shortage, investors still don’t want their crude oil production to expand. This is frustrating the White House, but investors know that the Biden administration is pushing for a long-term reduction in oil-and-gas consumption. So Occidental and its rivals are happy to keep improving their financial standing.
A Credit Spread Example
Right now, the energy sector’s momentum is negative, so I’m not content to call it a bottom. But long-term buy-and-hold investors might want to consider a simple way to trade this position and wait.
The July 15, 2022, $50 put sells for $1.35. Investors can sell that put and then purchase the $47.50 put for the same month. That same put trades for about $0.87. So, you will need about $202 in margin to make this trade. This is called a credit spread.
Your goal is to generate $48 (the credit spread) on roughly $202 in margin. That represents a total return of about 23.8% (or 377% annually). Therefore, your breakeven price – due to the credit spread is about 23.8%.
In addition, your probability of profit is north of 78%. The worst-case scenario is that the stock does fall under $50, and you purchase shares for nearly 10% less than the value of Warren Buffett’s recent purchase.
I’ll circle back tomorrow with more on the energy space. For now, take a look for opportunities like this. We’re not going to fully shutter energy production. We will still be relying on gasoline for at least three decades to power our vehicles.