Warren Buffett Is Doubling Down on Occidental Petroleum Stock

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In the second quarter of 2022, Berkshire Hathaway, which is led by the legendary Warren Buffett, net bought $3.8 billion worth of shares. The Oracle of Omaha doubled down on energy stocks and added to the already large positions in Occidental Petroleum and Chevron.

Berkshire held around a 20% stake in Occidental at the end of June. The conglomerate also owns preferred shares and warrants that give the company an almost 30% stake. Now, it has got the approval to increase the stake to 50%.

Berkshire Hathaway invested in Occidental Petroleum in 2019

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 looks to increase its stake in Occidental even further

In July Berkshire requested the Federal Energy Regulatory Commission for authorization to increase its stake to 50%, which has been granted now. Carlos D. Clay from the FERC’s Office of Energy Market Regulation said that “It is concluded that the Proposed Transaction is consistent with the public interest.” Notably, Berkshire has its own energy business also.

Energy prices have rebounded

Meanwhile, thanks to the rise in energy prices, Occidental’s earnings have risen dramatically. It made a net profit of $3.7 billion in the second 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 when 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 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.

Warren Buffett on Occidental Petroleum

Among others, Buffett looks at strong and ethical management teams before investing in the company. He has often praised Apple’s CEO Tim Cook. Apple is the largest holding for Berkshire Hathaway and Buffett has bought more shares in the first half of 2022.

During Berkshire’s annual meeting, Buffett praised Occidental’s CEO Vicki Hollub. He said, “Vicki was saying what the company had gone through and where it was now and what they planned to do with the money.” Buffett added, “What Vicki Hollub was saying made nothing but sense. And I decided that it was a good place to put Berkshire’s money.”

Why is Buffett buying more Occidental shares?

Notably, Occidental Petroleum has been repaying its massive debt pile. It had a debt pile of $36 billion which has now fallen to $22 billion. The company has been repaying its debt using strong organic cash flows.

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 Precision Castparts. In 2022, the company announced the acquisition of Alleghany for over $11 billion.

Buffett seems to like oil stocks

Buffett seems to like oil stocks. While he loaded up on pharma shares in 2020, he has exited most of them, including Pfizer and Merck. Of late, Buffett has warned up to oil and gas stocks. The conglomerate net bought $41 billion worth of shares in the first quarter of 2022. Buffett has gone slow on buybacks after having repurchased almost $50 billion worth of shares between 2020 and 2021.

In 2022, he has turned into a net buyer of stocks after having been a net seller in all four quarters of 2021. Amid the buying flurry, Berkshire’s cash pile is now down to $105 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.

What other stocks is Buffett buying?

Berkshire has increased its stake in Ally Financial, Apple, Paramount Global, and Celgene in the second quarter of 2022. It sold shares in Kroger, Store Capital, and General Motors. The conglomerate also fully exited Royalty Pharma and Verizon in the quarter.

Will Buffett buy more Occidental Petroleum shares?

Cole Smead, president of Smead Capital Management believes that Buffett would continue to buy more Occidental shares. “He will likely continue to buy as much as he can get below $70 or $75. If you own 30% or 40% and would like to buy it out at $95 or $100, you saved a lot of money,” said Smead. The maximum that Buffett had paid for Occidental is $60.37 per share. The stock rose almost 10% on Friday and closed above $71.

About Mohit PRO INVESTOR

Mohit Oberoi is a freelance finance writer based in India. He has completed his MBA in finance as a major. He has over 15 years of experience in financial markets. He has been writing extensively on global markets for the last eight years and has written over 7,500 articles. He covers metals, electric vehicles, asset managers, tech stocks, and other macroeconomic news. He also loves writing on personal finance and topics related to valuation.