Occidental Petroleum: Warren Buffett Ups Stake While David Tepper Exits
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Several hedge funds have released their third-quarter 13Fs over the last couple of days. While Warren Buffett’s Berkshire Hathaway increased its stake further in Occidental Petroleum, David Tepper’s Appaloosa Management has exited the company.
Apart from Occidental, Tepper exited several other small holdings including Micron, Netflix, Disney, and Kohl’s. He also trimmed stakes in his bigger holdings like Alphabet, Amazon, Meta Platforms, and Constellium Energy.
Berkshire Hathaway bought more Occidental Petroleum shares
Talking of Berkshire, the conglomerate increased its stake in Occidental Petroleum further and now holds a 21.4% stake. Buffett also increased its stake in Chevron as the “Oracle of Omaha” continued to add more energy stocks. At the same time, he trimmed financial holdings and sold shares of Bank of New York Mellon and U.S. Bancorp.
The biggest surprise in Berkshire’s Q3 13F was meanwhile the new position in Taiwan Semiconductor Manufacturing which is valued at around $4 billion. Buffett has made several surprise moves this year including buying shares of HP, Citi, and Activision-Blizzard.
Buffett has gradually added Occidental shares
In 2019, Berkshire financed Occidental Petroleum’s acquisition of Anadarko Petroleum and invested in preferred stocks with attached warrants. When oil prices tanked in 2020, Occidental Petroleum shares tanked. It looked that Occidental would join the list of Buffett’s worst investments ever.
However, energy prices, as well as energy stocks rebounded in 2021 and have continued to do well in 2022 as well. Occidental is the leading S&P 500 gainer this year even as tech stocks continue to languish at the bottom of the index.
Berkshire has the permission to increase its stake in Occidental to 50% as its request was approved by the Federal Energy Regulatory Commission. Since the stake has surpassed 20%, Berkshire would consolidate Occidental Petroleum’s earnings from the current quarter.
Berkshire’s Q3 2022 earnings
Last weekend, Berkshire released its Q3 2022 earnings and reported revenues of $76.93 billion, a YoY rise of nearly 9%. Its operating profits surged 20% to $7.76 billion in the quarter. It however posted a net loss in the quarter due to the mark-to-market losses on its equity portfolio.
Occidental Petroleum posted healthy profits
Meanwhile, thanks to the rise in energy prices, Occidental’s earnings have risen dramatically. It made a net profit of $2.5 billion in the third quarter of 2022 after having lost $14.8 billion in 2020. In 2020, crude oil prices slumped and the WTI futures briefly turned negative. It was the first time in history that oil futures turned negative. However, back then there were no takers for crude oil and companies were willing to pay money to clear the oil from the fields.
Energy prices are still high
Energy prices have since rebounded. While prices have come off their 2022 highs and have fallen below $100 per barrel, they are still quite higher as compared to what we’ve seen since 2014.
The OPEC+ has also lowered its oil production amid slowing demand. While world leaders especially US President Joe Biden have criticized OPEC+ and Saudi Arabia for cutting oil production, the bloc went ahead with the cuts.
Notably, Occidental Petroleum has been repaying its massive debt pile. It had a debt pile of $36 billion which has now fallen to below $20 billion. The company has been repaying its debt using strong organic cash flows. In the third quarter, it repaid $1.3 billion in debt which took its YTD debt repayment to $9.6 billion.
Buffett might eventually acquire Occidental
Neal Dingmann, an analyst with Truist Securities believes that Occidental’s strong cash flows made it an attractive company for Berkshire. David Kass, a finance professor at the University of Maryland’s Robert H. Smith School of Business believes that Berkshire would eventually acquire Occidental. The last major acquisition by Berkshire was way back in 2015 when it acquired Precession Castparts. In 2022, the company announced the acquisition of Alleghany for over $11 billion.
Notably, for over two years now, Buffett is hunting for what he calls an “elephant-sized acquisition.” However, he hasn’t been able to identify such targets. In 2022, he has turned into a net buyer of stocks after having been a net seller in all four quarters of 2021.
Buffett has slowed share buybacks this year
Buffett has however gone slow on stock buybacks. Amid the buying flurry, Berkshire’s cash pile is now down to $109 billion. The cash on Berkshire’s balance sheet had almost risen to $150 billion at one point in time as Buffett was not able to identify investment opportunities.
The conglomerate generates billions of dollars in organic cash flows every year. It also earns billions of dollars in dividends from investee companies. Berkshire however does not pay a dividend.
Coming back to Occidental, while Buffett seems to find value in the company, Tepper seems to believe otherwise. Occidental stock is trading almost flat in US premarket price action today and has a 52-week trading range of $26.05-$77.13. Its dividend yield of 0.71% is meanwhile much below other energy companies.
