Warren Buffett’s Berkshire Hathaway has been buying shares of Occidental Petroleum over the past few years. Buffett has praised Occidental’s CEO, Vicki Hollub, and the company’s extensive oil and gas holdings in the United States. Occidental Petroleum is currently Berkshire Hathaway’s sixth-largest holding.
Buffett told CNBC this summer, “I read every word, and said this is exactly what I would be doing. The CEO is running the company the right way.”
Buffett may like Occidental for its exposure to rising oil prices. The company recently agreed to acquire CrownRock for roughly $12 billion.
This will add immediate cash flow for Occidental, but also additional debt and increased exposure to high-decline shale assets. If oil prices rise from around $70 per barrel today to $75 per barrel, a 7% increase, Occidental believes its free cash flow per share would jump from $4.22 to $5.27, a 25% increase. Occidental has a lot of leveraged upside in a rising-price environment.
However, Occidental also has leverage in a falling-price environment. Since April, the company’s share price has declined by nearly 30%, mainly due to market prices for oil declining by nearly 20% over the same time period. After the decline, Occidental shares are trading at 11.5 times expected free cash flow at $70 oil prices.
Buffett’s interest in Occidental
That’s a fair price for those who are bullish on oil’s long-term pricing. Investors should be willing to double down should oil markets show further weakness, which will likely pressure Occidental shares further.
Occidental has plenty of financial levers to pull in such a scenario, such as suspending its share buyback program and lowering its 1.8% dividend. When oil prices reverse course, Occidental should be ready to capitalize. Berkshire Hathaway has secured regulatory approval to acquire up to 50% of Occidental, though it currently holds 27.2%.
Two main factors might drive Buffett’s decision to significantly increase his position in Occidental before the end of 2024:
1. Occidental is cheaper now than it was earlier in the year when Berkshire last added shares. Berkshire also holds warrants that allow it to purchase Occidental shares at a fixed price, mitigating valuation risks.
2. The business environment for oil producers, including Occidental, could become more favorable under changing political conditions that might reduce regulations. While it’s not a certainty that Buffett is buying Occidental stock aggressively before 2024 ends, the odds seem favorable.
The definitive answer will come in mid-February when Berkshire Hathaway’s regulatory filings for Q4 reveal its stock acquisitions.
