Warren Buffett bought 12.7% of Occidental Petroleum shares. Will he buy the rest?

Warren Buffett bought loads of


western oil

Stock. Will he buy it all?

This is the question some investors are asking after the aggressive purchases of


Berkshire Hathaway

(Ticker: BRK/B) over the past two weeks of Occidental Petroleum (OXY) stock.

Berkshire now owns 118.3 million shares of Occidental, a 12.7% stake, worth $6.9 billion after buying nearly 90 million shares of the major energy company since March 2. based on late Friday filing.

It’s highly unusual for Buffett, who oversees Berkshire’s $350 billion stock portfolio, to buy shares of a company so actively and openly. The Berkshire purchase helped push Occidental’s share price up more than 30% in March to $57.95 on Friday, outpacing the rest of the broader energy sector. Berkshire shares hit a record high on Friday and Class B shares ended at $326.60, up 0.4% during the session.

Berkshire has been stuck pursuing what Buffett called an “elephant-sized” acquisition — or any big deal, for that matter — ever since it paid more than $30 billion for Precision Castparts. in 2016. This deal was a disaster for Berkshire due to the pandemic’s fallout on the commercial aerospace industry. But more than anything, Buffett is price-conscious, which may be the main reason he didn’t strike a deal.

Its Western purchases also do not appear to be aimed at gaining more exposure to the energy sector. If so, Buffett could have bought more shares of


Chevron

(CVX), which Berkshire already owns, and haven’t impacted Chevron’s share price too much. Nor would he have had to publicly declare the purchases within two business days, as he must do now with Occidental as a 10% holder.

Why would Occidental potentially appeal to Buffett?

He knows the business well after investing $10 billion in Occidental preferred stock, which pays a lush dividend yield of 8%, in 2019 when Occidental CEO Vicki Holub was seeking quick funding in a bidding war with Chevron for Anadarko Petroleum, which Occidental won with part of the investment in Berkshire. Berkshire also got 83.9 million free Occidental warrants as part of the deal, which are minted at $59.62 per share.

Occidental is also the right size. The company is now valued at $54 billion, making it very digestible for Berkshire, given its nearly $150 billion in cash.

Occidental’s valuation is still reasonable assuming oil prices do not collapse from the current $110 a barrel. Shares are trading at less than 12 times expected 2022 earnings of around $5 per share and that estimate may turn out to be low given the recent spike in energy prices. In a recent note, Morgan Stanley analyst Devin McDermott wrote last week that the broader oil and gas sector looked attractive and that Occidental was discounting an oil price of around $61 a barrel from the 24-month strip or two-year average futures price of $93 per barrel.

Buffett is not shy about investing in the energy sector, unlike some socially responsible investors.

At Berkshire’s annual meeting last year, Buffett was asked about the morality of his stake in Chevron and he replied:

“I mean Chevron is not an evil company at all. And I have no qualms about owning – at least owning Chevron. Berkshire Vice Chairman Charlie Munger added: ‘You can imagine 2 things. A young man is getting married in your family. He’s an English professor, let’s say in Swarthmore where he is… he works for Chevron. Which one would you choose? I’ll take the Chevron guy.

A Berkshire deal for Occidental could please Occidental’s board after more than two years of dealing with activist investor Carl Icahn, who recently divested his stake in the company. And a bid from Berkshire probably wouldn’t generate the kind of antitrust objection that a takeover bid from Chevron or


Exxon Mobil

would rush.

There is priority. Berkshire amassed a 20% stake in Burlington Northern Santa Fe in 2008, and Buffett waited until his stock hit after the financial crisis to strike a deal in 2009 to buy the entire railroad company.

If oil prices pull back, as do shares of Occidental, Berkshire could offer to pay $70 or $75 per share in cash for Occidental, still below its 2018 high of $87. At $70 billion, such a deal would be entirely doable for Berkshire.

A transaction should be friendly since Berkshire does not conduct hostile transactions. Buffett also prefers to pay cash and not issue Berkshire stock. Buffett said Berkshire would not participate in the corporate auction, although that could change if the right deal materializes.

Occidental produces about 1.2 million barrels of oil equivalent per day and has been an industry leader in carbon capture. The company was burdened with high debt following its purchase of Anadarko Petroleum in 2019, but quickly paid it off thanks to strong energy prices. Last month, Occidental CEO Vicki Holub said the company aims to reduce its net debt to less than $25 billion by the end of the first quarter. The shares are up from a low of less than $10 in 2020.

Buffett likes US-focused businesses, and Occidental gets about 80% of its energy production from the domestic market.

Buffett normally buys stocks quietly and steadily over time, as he did with Berkshire’s largest stock holding,


Apple

(AAPL), which Berkshire bought from late 2016 to 2018. Buffett may be secretive. He sometimes seeks – and receives – regulatory approval to keep Berkshire stock purchases secret for a period of time, as he did when Berkshire bought Chevron in 2020.

Occidental’s loud buying could mean that Buffett has more in mind than just having a passive stake in the company.

Write to Andrew Bary at [email protected]

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