A commodity cycle is underway again, and this time, Warren Buffett is backing up the new views on the energy sector’s potential rally higher. According to the CME’s FedWatch tool prediction for September 2024, interest rate cuts could be underway soon. If the Fed ends up delivering these cuts, demand for oil due to business activity could soon soar.
More than that, recovering economies like China, which represented roughly 40% of global oil demand pre-COVID, could help deliver the sort of tailwinds that the commodity needs to make new highs. Ultimately, just like any other dollar-quoted commodity, a potentially weaker dollar ahead will have a bullish effect on oil and other commodities, as investors would have noticed the all-time high gold prices recently.
Interest rates significantly drive currency valuations, making the macro picture a perfect setup for investing in oil stocks. Buffett’s 29% ownership in Occidental Petroleum Co. (NYSE: OXY) leads the way, but retail investors not bound by the size of a company can look into other high-growth names. These include Helmerich & Payne Inc. (NYSE: HP) and Chesapeake Energy Co. (NASDAQ: CHK) as a way for investors to see more aggressive growth without expensing safety.
Buffett's Occidental Petroleum Stock Pick Is a Classic Value Play
After accumulating such a massive stake in the stock, investors were left to wonder whether Buffett’s view included just the potential rally in oil or if it also had a mix of dollar bearishness built in. Buffett isn’t too excited about the dollar, as he cut 50% from his Apple Inc. (NASDAQ: AAPL) investment in the same quarter.
Weaker currency translates into weaker consumer discretionary demand, which isn’t good for Apple, despite Buffett blaming his sale on tax reasons. Wall Street analysts forecast up to 30.8% earnings per share (EPS) growth from Occidental Petroleum. Considering the stock now trades at only 81% of its 52-week high, the foundation for a value play could be set up.
Those at Scotiabank agree with Buffett; Occidental Petroleum should see better days ahead. According to analysts, Occidental Petroleum stock’s fair value is closer to $80 a share, calling for up to 40% upside from where the stock trades today. More than that, bears have shown signs of capitulation in the face of all these bullish factors, as the stock’s short interest declined by 6.4% in the past month alone.
Helmerich & Payne Stock Is Cashing In First—And So Are Investors
Like any other, the oil and gas industry has a value chain for corporate profits. Those at the bottom, the producers and refiners like Occidental or even Exxon Mobil Co. (NYSE: XOM), tend to get paid last, as they need to sell oil at more expensive prices during the cycle.
Closer to the top, stocks like Helmerich & Payne manufacture and lease the equipment with which these producers will ramp up their inventory. So, if the expectation for oil is set higher, this company will likely see increased new orders ahead of the cycle, something analysts have been following for a while now.
Goldman Sachs predicts oil will trade as high as $100 a barrel by the end of 2024, helping analysts reach a clearer price target for Helmerich & Payne stock. The Royal Bank of Canada has slapped a fair value of $50 a share on this stock, daring it to rally by as much as 47.5% from today’s price.
As the stock has reached 91% of its 52-week high, investors can see that momentum favors this over Buffett’s pick. Being a $3.3 billion company puts Helmerich & Payne out of the reach of mega investors like Buffett, creating an edge for retail investors who have no problem investing smaller sums.
In fact, Dimensional Fund Advisors decided to cash in on the company’s place in the value chain. As of August 2024, they had boosted their positions by 3.3%, bringing their net investment up to $201.5 million today.
Chesapeake Energy Poised for Massive Growth, Offering Easy Entry for Investors
Now trading at only 79% of its 52-week high, Chesapeake stock offers an uneven upside advantage for retail investors. Considering that Wall Street analysts now forecast up to 270.9% EPS growth in the next 12 months for Chesapeake stock, the upside in the exploration niche is as clear as ever.
Those at Stephens think this company should be valued closer to $118 a share, which calls for up to 59% upside from where the stock is trading today. To add to the massive upside potential, the company offers shareholders a $2.3 payout, representing an annualized dividend yield of 3.1% to keep up with inflation.
Covering the rising cost of gas from higher oil prices through a dividend, investors can afford to sit and wait for a potential investment in Chesapeake Energy stock until it pays out the way analysts expect. More than that, those at Massachusetts Financial Services have boosted their stakes by 7.6% as of August 2024.
This brings the asset manager's net investment up to $338.6 million today, or 3.1% ownership in the company. These managers must have recognized the discount in Chesapeake's 0.9x price-to-book (P/B) compared to the energy sector's average valuation of 3.4x today.
