Why Occidental Petroleum, Devon Energy, and Core Laboratories Plunged Today

What happened

Shares of Occidental Petroleum (NYSE: OXY), Devon Energy (NYSE: DVN), and Core Laboratories (NYSE: CLB) fell hard on Tuesday, plunging 4.2%, 7.1%, and 8.1%, respectively, as of 2:38 p.m. ET.

There wasn’t any company-specific news out of these three companies today, other than the fact that legendary investor Warren Buffett continues to buy Occidental, according to a filing released over the weekend. Additionally, Devon Energy saw its price target lowered today by a Wall Street analyst, though that analyst kept the same neutral rating on the stock.

Buffett’s optimism for Occidental specifically and oil prices generally flies in the face of the price action today. The energy sector had been a relative winner year to date, but oil prices plunged on Tuesday following the July Fourth weekend.

Following the Federal Reserve’s aggressive June interest rate hike and continued lockdowns in China, it appears recession fears are lingering, in which case oil demand may go down. On the other hand, there is also some concern about supply availability, as the Russia-Ukraine war and underwhelming production increases from OPEC+ leave the oil markets in a state of flux, with both bullish and bearish crosswinds.

Still, as these stocks have been relative winners year to date, investors appear to be selling the sector now and rotating into beaten-down tech stocks today.

So what

Oil prices plunged on Tuesday, falling below $100 per barrel for the first time since late April and early May. That hurts the whole sector, and especially producers like Occidental and Devon, which sell oil at current prices. As an oilfield services provider, Core Labs is also affected, as lower prices could lead to lower investment. 

Analysts at Citigroup forecast today that if the U.S. falls into a recession, oil could fall to $65 per barrel within the year. Of course, a recession may not happen, but some predict it will as the Fed hikes interest rates aggressively to tame inflation. Higher interest rates in the U.S. also tend to raise the value of the dollar. Since oil is priced in dollars, a higher-valued dollar means a lower oil price, all else being equal. 

Additionally, since the July Fourth holiday has passed, some speculators may believe U.S. oil demand is set to fall after the “peak season.” The Energy Information Administration showed gasoline consumption was actually down 2% year over year in the four weeks leading up to June 24, as consumers drove less amid high prices. Finally, China appears to be beginning to lock down parts of the country again amid its harsh “zero-Covid” policy, as new cases emerged over the weekend in Xi’an and Shanghai.

The China lockdowns and U.S. recession fears appear to be winning the day against concerns over supply tightness from major oil producers. The Russia-Ukraine war is still going on, and some have voiced concerns that OPEC+ doesn’t have as much spare capacity as thought, due to underinvestment during the pandemic. Therefore, any surge in demand could lead to another price shock upward.

Meanwhile, sanctions on Russia could continue to hurt output as it loses key technology. For instance, the Russia sanctions are especially hurting Core Laboratories. Core Labs has unfortunately not benefited to the extent of the producers, since higher prices have come due to the lack of investment in oil field services. And whereas Occidental and Devon don’t have any business in Russia or Ukraine, Core Labs does. Thus, Core Labs was in a weaker position coming into today, even with the higher oil prices that benefited Occidental and Devon. That’s why it’s down more and the riskier play, as are all the oilfield services companies.

The recent sell-off in oil prices also caused one oil analyst at Goldman Sachs to lower his price target on Devon Energy today, from $70 to $61, while keeping a neutral rating on the shares.

Now what

Even in the face of this oil price sell-off, billionaire Warren Buffett continues to scoop up shares of Occidental Petroleum. Buffett has long had a preferred stock position in the company, but began buying the equity outright amid the outbreak of the Russia-Ukraine war. As oil prices have plunged in the past two weeks, Buffett has upped his stake. Last week, his conglomerate, Berkshire Hathaway, bought another 9.9 million shares, bringing the total to 163.4 million overall. When one considers the stock Berkshire would get by exercising the warrants it received with the preferred notes a few years ago, that would equate to about 25% of Occidental’s stock.

The big buying has led some to believe Buffett wants to acquire the whole company. So, while today’s violent moves up and down appear to be the result of traders, Buffett appears to have a constructive longer-term outlook on oil prices generally. Remember, Buffett has a very long-term orientation, often saying his favorite holding period is “forever.” Meanwhile, if Berkshire buys Occidental outright, it will have to hold it, as it won’t be able to sell shares on the public markets like it can today.

For those without any energy exposure, the recent crash may therefore be a time to add some energy exposure to the portfolio, if even in a small amount, to hedge against future supply shocks.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Billy Duberstein has positions in Berkshire Hathaway (B shares) and Devon Energy and has the following options: short July 2022 $45 puts on Devon Energy. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares) and Goldman Sachs. The Motley Fool recommends Core Laboratories and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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