Buffett and Berkshire to buy up to 50% of Occidental Petroleum. Why?
Warren Buffett and Berkshire Hathaway have been buying Occidental Petroleum (OXY) throughout 2022. Berkshire now owns more than 20% of OXY’s stock. They have now received approval to buy up to 50% of OXY’s shares. But, why is Buffett buying so much OXY stock?
CEO familiarity
Berkshire has worked with the CEO (Vicki Hollub) on prior transactions. Berkshire facilitated OXY’s acquisition of Anadarko. In return, Berkshire obtained preference shares. Buffett has previously highlighted that he prefers to invest in quality CEOs, specifically stating “our goal is to have meaningful investments in businesses with both durable economic advantages and a first-class CEO”. The prior investments with Hollub – and continued investment in OXY’s shares – likely suggest continued confidence in the CEO.
Oil prices
Oil prices have remained elevated throughout 2022. They have largely hovered around $100 per barrel. OXY has claimed that it can break even at a price of $40 per barrel. Oil is likely to have continued support.
On the supply side: There has been long term structural under-investment in oil and fossil fuels. This suggests a dearth of new production. OPEC reportedly has relatively little spare capacity. There could be come additional output from Libya and Iran. However, there are geopolitical risks and uncertainties with both.
On the demand side: Demand could face some downward pressures due to recession risks. However, potentially off-setting this is the continued re-opening in China. Over the long term, the world will transition away from oil However, this is likely to take a long time.
Financial position and payouts
OXY has steadily reduced its debt over time. OXY’s debt increased significantly following the Anadarko acquisition. However, as Simply Wall St documents, OXY has reduced debt significantly and its debt/equity ratio is now around 80%.
OXY has also indicated that it aims to significantly increase payouts to shareholders after the debt level falls below $25 billion, which it has now done. Therefore, there is a strong chance of an increase in payout via either a dividend or a repurchase. Warren Buffett has previously remarked favorably on companies with significant payouts and buybacks.
Inflation Reduction Act and Carbon Capture Credits
OXY stands to benefit from the Inflation Reduction Act. This is for two reasons. First, the focus on green energy and renewals will likely exacerbate under-supply in oil. This will likely support oil prices in the near term, thereby supporting OXY. Second, the Inflation Reduction Act contains carbon capture credits. OXY has had significant plans for carbon capture facilities. Thus, the Act could create operational benefits for OXY.
What are analysts saying?
Analyst forecasts and views are mixed: According to Factset, 38% of analysts have OXY has a buy, and 52% as a hold. This suggests reasonable positivity. However, the price target is not significantly above the current share price. This apparent conflict could be due to significant variance in analysts’ price targets and the positive prospect of dividends rather than price appreciation. In any case, the positive analyst views is consistent with Berkshire’s move to buy more stock.
