Since becoming CEO of Berkshire Hathaway (BRK.A) (BRK.B) in 1965, Warren Buffett has run circles around all three of Wall Street’s major stock indexes. Whereas the broad-based S&P 500 has enjoyed an aggregate total return, including dividends paid, of nearly 36,000% since the affably dubbed “Oracle of Omaha” became Berkshire’s head honcho, Buffett has overseen just shy of a 5,000,000% aggregate gain in his company’s Class A shares (BRK.A).
When you outperform the broader market by this magnitude, you’re going to draw quite the audience. It’s why roughly 40,000 people flock to Omaha, Nebraska, each year to listen to Warren Buffett speak about his company, the U.S. economy, and his investing philosophy.
It’s also why Berkshire Hathaway’s Form 13F filing is the most-anticipated on Wall Street. A 13F provides an easy-to-understand snapshot of what Wall Street’s smartest investors have been buying and selling in the most recent quarter.
Although Buffett and his top investment aides, Ted Weschler and Todd Combs, and have been net-sellers of equities in each of the last six quarters, there is one stock that’s been purchased with regularity since the start of 2022. I’m talking about energy titan Occidental Petroleum (OXY).
The Oracle of Omaha is piling into shares of oil and gas giant Occidental Petroleum
The Oracle of Omaha and his team have purchased 255,281,524 shares of Occidental Petroleum, based on the latest Form 4 filing with the Securities and Exchange Commission, as of this writing. For context, this represents almost 29% of Occidental’s outstanding shares and brings Berkshire’s position in the company to nearly $16 billion in market value.
All told, Buffett has over $36 billion of the $388 billion investment portfolio overseen at Berkshire Hathaway invested in two oil and gas stocks: Occidental and Chevron (CVX).
There are quite a few widely recognized reasons for Buffett and his team to be optimistic about Occidental and Chevron.
For one, the International Energy Agency’s World Energy Outlook 2023 suggests fossil fuel demand will peak in 2030 as clean-energy solutions begin to take hold. While this might seem like a downer for oil and gas stocks, it implies continued expansion of oil and gas demand throughout the current decade. Further, it’s not as if demand for oil and natural gas is going to fall of a cliff anytime soon. Even if this demand tapers a bit in the 2030s, most large-scale energy companies have also been making investments in cleaner solutions.
The COVID-19 pandemic has served as another catalyst for Occidental and Chevron.
For roughly three years during the height of the pandemic, global energy majors were forced to significantly reduce their capital expenditures (capex) due to unprecedented demand uncertainty. Even with the worst of the pandemic in the rearview mirror and capex returning to normal, ramping up supply to meet demand has proved challenging. When the supply of an in-demand good or service is constrained, it’s common for the price of that good or service to go up. Not surprisingly, the spot price of crude has remained elevated.
This is a particularly important catalyst for Occidental Petroleum. Even though it’s an integrated operator, it generates the lion’s share of its revenue from its upstream drilling segment. When the spot price of crude oil rises, Occidental’s operating cash flow benefits more than just about another major oil and gas company.
Warren Buffett and his team are probably also liking what they see from a balance sheet standpoint. Following Occidental’s $55 billion acquisition of Anadarko in 2019, which bolstered its presence in the Permian Basin and in the Gulf of Mexico, Occidental was swimming in debt. Thanks to mindful spending and a higher spot price for oil, the company has been able to more-than-halve its net long-term debt from over $38 billon at the end of 2019 to $18.5 billion, as of March 31, 2024.
Here’s the (probable) under-the-radar reason why Buffett can’t stop buying shares of Occidental
While these are all logical reasons to purchase shares of Occidental Petroleum stock, I’d argue there’s a subtler catalyst behind Buffett’s regular mashing of the buy button. It all has to do with the aforementioned acquisition of Anadarko in the summer of 2019.
At the time, Occidental and (coincidentally) Chevron were in something of a bidding war to acquire Anadarko. Buffett’s company handed over $10 billion to assist Occidental with its ultimate winning bid. In exchange, Berkshire Hathaway received $10 billion of preferred stock in Occidental Petroleum, which yields 8% annually, as well as warrants to purchase up to 80 million shares of Occidental common stock, with an exercise price of $62.50 per share.
During the COVID-19 pandemic, the historic oil and gas demand cliff coerced Occidental to slash its dividend and pay a portion of its preferred 8% annual dividend to Berkshire Hathaway in common stock. Having to issue shares to cover its preferred stock dividend led to anti-dilution adjustments to the warrants Buffett’s company had received in 2019. As June 17, 2024, Berkshire Hathaway holds warrants to 83,858,848.81 common shares of Occidental Petroleum at an exercise price of $59.624 per share.
Although it’s possible Buffett’s regular purchases of Occidental stock in the mid-to-high $50s is an indication that he and his team see value — Occidental trades roughly 16.5 times forecast earnings for 2024 and 13 times forward-year earnings — it makes far more sense that Berkshire’s brightest minds are trying to hold the invisible line and ensure that its nearly 83.9 million common stock warrants remain in the black.
If Occidental’s stock stays above $59.624 per share, Berkshire will be able to exercise these warrants at a future date and potentially claim an instant profit.
This isn’t the first time Buffett and his team have done this, either. When Berkshire Hathaway acquired $5 billion in preferred stock of Bank of America (BAC) following the financial crisis in August 2011, Buffett’s company received more than just a 6% annual dividend yield in return. This investment came with warrants to purchase up to 700 million shares of Bank of America stock at $7.14 each. With shares of BofA trading around $24 In the summer of 2017, Berkshire Hathaway’s investment savants exercised these warrants and instantly landed a massive profit.
If macro factors cooperate, Warren Buffett’s willingness to hold the proverbial line in the sand with Occidental Petroleum could lead to a hefty payday if and when these warrants are exercised.
— Sean Williams
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Source: The Motley Fool