The energy sector is off to a hectic start in 2024. This stock is the only existing stock that Warren Buffett added to in the first quarter.

The stock market started this year with a fever. Advanced technology Nasdaq Composite is up 11% so far in 2024, driven by artificial intelligence (AI) hype. What’s more, S&P500 also gained nearly 11%, signaling overall strong positioning among broader market sectors.

The energy industry in particular is doing well so far this year – i Berkshire Hathaway CEO Warren Buffett has taken note. According to Berkshire’s latest 13F filing, Buffett only added one existing position in the first quarter of 2024.

Oracle of Omaha has acquired 4.3 million shares of the oil and gas conglomerateWestern crude oil(NYSE:OXY). Is it worth following Buffett’s lead? Let’s find out.

Division of Occidental Petroleum

The energy sector includes many different types of businesses. There are tons of companies contributing to the overall energy landscape, ranging from nuclear, refining and pipelines.

Occidental Petroleum is primarily active in the exploration of crude oil and natural gas. The chart below illustrates some important operating metrics for the company and provides insight into its long-term performance.

OXY revenue data (quarterly) by YCharts

The above financial trends illustrate the ebbs and flows of Occidental’s business. This isn’t entirely surprising. Oil and gas are commodities and can be subject to dramatic price volatility. Because of this, operating results may vary significantly.

As shown in the chart above, Occidental Petroleum reported revenue of $5.9 billion in the first quarter of 2024. This represents a decline of 19% year-on-year. Moreover, net profit also declined from $1.3 billion in the first quarter of 2023 to $888 million this year.

Given the noticeable level of volatility in Occidental’s business, coupled with declining sales and profitability, why would Buffett buy the stock?

A new opportunity for development appears

In energy, one of the most significant emerging growth opportunities is in renewable and sustainable energy programs. Although Occidental Petroleum operates primarily in the oil and gas sector, the company is looking at new opportunities: managing carbon emissions. In particular, the company is focusing on a carbon dioxide removal process called direct air capture.

During the first quarter earnings call, investors learned that Occidental’s first direct air capture facility is scheduled to begin operations in the middle of next year. While this may sound like great news on the surface, it’s important to remember that these investments come with a high price tag. Occidental plans to spend up to $6.6 billion in 2024 on capital expenditures (capex), of which almost $600 million will be allocated to low-emission projects.

However, diversification beyond its existing oil and gas exploration products should help pave the way for Occidental Petroleum’s new business. Moreover, management expects the low-carbon venture business to “generate cash flows independent of oil and gas, price volatility, and further strengthen Oxy’s cash flow resilience.”

Is it worth buying Occidental Petroleum shares?

The chart below illustrates Occidental’s share price movement over the past three years. You can see that the stock has soared in early 2022. This push came after it was revealed that Buffett had a position at the company.

After a brief price rally, Occidental’s stock has remained flat over the past few years. There were indeed some short-lived peaks and troughs, but overall the herd didn’t shift too dramatically one way or the other.

OXY data from YCharts

Occidental stock is currently trading at a forward price-to-earnings (P/E) ratio of 16.7. For comparison, the S&P 500 Index’s forward P/E is 20.8.

The cyclical nature of the oil and gas industry may impact a company’s performance on both a quarterly and annual basis. Inconsistency in operating trends can certainly impact share prices, which in some ways can make valuation multiples difficult to decipher as they tend to change relatively quickly.

With this in mind, Occidental is currently trading at a discount to the broader market. While this doesn’t necessarily represent an opportunity to buy the dip, I think investors with a long-term horizon might consider following Buffett’s lead.

Despite some volatility in its financial profile, Occidental remains highly profitable and cash flow positive. Moreover, the company is aggressively reinvesting excess profits into the business to expand into new, innovative markets. I think these characteristics are what Buffett cares about most with his investment in Occident Petroleum.

I am optimistic that the company will strengthen its current operations through low-emission exploration activities and enter a new phase of growth that it will be able to sustain in the long term.

Is it worth investing $1,000 in Occidental Petroleum now?

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Adam Spatacco has no position in any of the companies mentioned. The Motley Fool takes positions on and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.