Warren Buffett may be a big fan of oil giant Occidental Petroleum , but Morningstar has a more bearish view on the stock. Shares in Occidental Petroleum closed at around $74 on Friday— a whopping 68.2% premium to Morningstar’s analyst David Meats’ fair value estimate of just $44. Occidental’s share price gain of around 140% this year represents a meteoric rise even for the energy sector, which has been the best-performing sector by a long mile this year. Much of the stock’s appreciation has been due to Buffett’s rising stake in the company. On Aug. 19, Buffett’s Berkshire Hathaway received regulatory approval to buy up to 50% of Occidental — the most significant milestone yet in Buffett’s steady stream of share purchases in the company this year. The approval by the Federal Energy Regulatory Commission fueled speculation that Buffett will eventually seek to acquire full ownership of the company. On the same day, shares in Occidental jumped 10% on the news. Buffet’s high stakes bet on Occidental has also led to similar interest from retail investors, making it a favorite retail stock this year, according to data from trading data platform VandaTrack. The origins of Buffett’s bet on Occidental has been well documented — the “Oracle of Omaha” started buying the stock after reading the company’s annual report and gaining confidence in Occidental’s growth and leadership. Read more Warren Buffett gets permission to buy up to half of Occidental Petroleum, boosting the shares These global stocks could do well in a recession and look cheap, say Morgan Stanley and UBS Goldman Sachs thinks this FAANG stock is a sell — and gives it downside of more than 20% But Morningstar’s Meats is decidedly more bearish. He has given the stock a two-star rating and a fair value estimate that is significantly below what the stock is trading at. Morningstar uses a star ranking system to help investors uncover stocks that are undervalued. The higher the discount to the stock’s fair value, the higher the star rating and the more attractive the stock is. In an Aug. 22 research note titled “Our Ultimate Stock-Pickers’ Top 10 High-Conviction Purchases,” Meats said Occidental has rightsized its upstream portfolio over the past few years to focus on its core holdings in the United States and the Middle East. The “very large and expensive” acquisition of Anadarko Petroleum in 2019 “further transformed” its portfolio but left Occidental with significantly higher debt that led it to suspend dividend payouts to shareholders. Prior to this, Occidental was a “historical leader” with a “peer-leading” free cash yield, Meats added. But he said he believes the company has now “turned the corner.” “Leverage ratios have dramatically improved, and the firm has resumed dividends. Management intends to continue supplementing this with substantial share repurchases,” he said. He acknowledged that Occidental has done “a better job” of generating returns for shareholders than most upstream oil and gas producers, having recovered from the steep decline in global crude prices that began in late 2014. The company is now able to generate substantial free cash flows and earn economic profits on the incremental dollars it invests, he added. Meats isn’t the only analyst with reservations about Occidental. Just 38% of analysts covering the stock have a buy call on it, according to FactSet data. More than half of the analysts have a hold rating on the stock. — CNBC’s Yun Li contributed to reporting.
