In early 2020 which marked the start of the pandemic, investors including too Warren Buffett they sold their holdings in Occidental Petroleum. A little over two years later, the oil and gas producer is the best stock in the S&P 500 and once again Buffett’s favorite.
Just over two years after the sale of its holdings in Occidental, Berkshire Hathaway has returned to being the company’s largest shareholder with a stake of approximately 20%. Also last Friday Buffett received SEC approval to buy up to 50% of the oil company.
Buoyed by the surge in commodity prices, Occidental has repaid its debt load and is generating liquidity. The energy group is strengthening its balance sheet and returning money to shareholders. In addition, Occidental holds the largest position in the most active US oil field, and is investing in technologies to reduce carbon emissions, which some of Buffett’s businesses are also doing.
“Occidental is a great target for Buffett,” he tells Wall Street Journal, Steven CheckCIO of Check Capital Management. “He’s American, has a great cash flow and is a rational capital allocator.”
That’s why Buffett chose Occidental
The wizard of Omaha has publicly praised the strategy of the CEO of Occidental Vicki Hollub, leaving many analysts speculating that Berkshire could buy the entire company. For the time being, Warren Buffett has not informed Occidental of any plans to acquire a controlling stake in the company and is unlikely to do so in the near term, according to sources in the Wall Street Journal.
“What Vicki Hollub was saying made a lot of sense”Buffett said at Berkshire’s recent annual shareholders meeting. “And I decided it was a good place to put the Berkshire money.”
Under Hollub’s leadership, Occidental has significantly reduced debt by carrying out “buybacks” and increasing dividends. Like other American oil companies, Occidental has been cautious about increasing production, despite rising oil prices.
That strategy is paying off. Occidental has generated a record of 4,35 billions of dollars in free cash flow in the second quarter e 3,7 billions of dollars in profits. After the stock fell by around 80% in 2020, Occidental’s shares rose by 138% this year, a rally driven, in part, by Buffett’s signings.
That said, the company still faces challenges. Long-term doubts remain about the demand for oil and gas as some countries switch to greener energy sources and some investors remain wary of the sector. Occidental is also betting heavily on carbon capture, a technology whose profitability has not been proven.
In 2020, Occidental entered the debt-laden pandemic of a $ 38 billion deal to take over rival Anadarko Petroleum, part of which it financed with $ 10 billion from Berkshire. The collapse in oil prices led the company to lay off its workforce and cut the salaries of executives, including CEO Hollub.
Although the deal with Anadarko seemed inappropriate, analysts said, activities related to the acquisition of Anadarko have since helped solidify its position as the largest producer in the Permian Basin in West Texas. The company said it produced around half a million barrels of oil per day nationwide in the second quarter of the year, up from around 280,000 barrels prior to the Anadarko acquisition.
Additionally, Occidental said it generates profit when crude oil prices are around $ 40 a barrel. In the second quarter of the year, Brent crude oil prices averaged $ 114 per barrel and US crude oil prices averaged $ 109 per barrel, according to Scotiabank.
All the facts indicate Occidental is part of a domestic oil production game for Buffett, said Bill Stone, chief investment officer of the Glenview Trust, who held shares in both Berkshire and Occidental at the end of the second quarter.
In 2022 Buffett also increased its stake in another US energy giant, Chevron, making it Berkshire’s fourth largest holding.
Occidental said it aims to achieve net zero emissions on its operations and energy consumption by 2040. The company has invested in carbon removal through its Oxy Low Carbon Ventures and plans to develop the first industrial-scale plant to capture the carbon dioxide from the air, which is said to require an investment in excess of a billion dollars.
The company’s goal of becoming a greener trader could increase Buffett’s appetite, according to analysts interviewed by the Wall Street Journal. Berkshire’s energy unit, Berkshire Hathaway Energy, has stated a goal of closing coal-fired units by 2049 and achieving net zero greenhouse gas emissions by 2050.