Berkshire Hathaway's 2023 Bet on Occidental Petroleum

Published Fri 02 June 2023 in Investments
Tags: Oxy
This fanpage is not officially affiliated with Berkshire Hathaway: Disclaimer

Berkshire Hathaway's recent investment in Occidental Petroleum has increased its stake in the company to 24.9%, demonstrating Warren Buffett's confidence in the oil producer's future prospects. Occidental Petroleum's strong financial performance and low break-even oil price make it an attractive investment opportunity, despite the challenges facing the oil industry. The company is well-positioned to benefit from the rebound in the oil market as the world recovers from the COVID-19 pandemic, making it a promising long-term investment for shareholders of Berkshire Hathaway.

Berkshire Hathaway's Bet on Occidental Petroleum: A Historic Investment with a Promising Future

Introduction

Berkshire Hathaway, led by legendary investor Warren Buffett, has recently made another significant investment in Occidental Petroleum by purchasing $275 million worth of the company's stock. This move has increased Berkshire's stake in the oil producer to 24.9%, making it a major shareholder in the company. In this article, we will discuss the reasons behind this historic investment, the current state of Occidental Petroleum, and its promising future in the oil industry. We will also delve into the impact of the COVID-19 pandemic on the oil industry as a whole.

Berkshire Hathaway's Stake in Occidental Petroleum

Berkshire Hathaway's recent purchase of Occidental Petroleum stock has raised its stake in the company to 24.9%. In addition to this, Berkshire also owns nearly $10 billion of Occidental's preferred stock and warrants. This shows the considerable confidence that Berkshire Hathaway has in the future of Occidental Petroleum. Furthermore, regulators have approved Berkshire to own up to 50% of Occidental, indicating that there is potential for even more investment in the company in the future.

It is important to note that despite this large stake, Warren Buffett has no plans to take over the company. This is in line with his investment philosophy of investing in strong businesses with competent management teams, allowing them to continue operating independently while benefiting from Berkshire's financial support.

Warren Buffett's Investment Strategy

Warren Buffett is known for his value investing approach, which involves identifying undervalued companies with strong fundamentals and holding onto them for the long term. One of the key factors that Buffett likely considered when investing in Occidental Petroleum is its low break-even oil price of about $40 per barrel. This means that even if oil prices continue to slide, Occidental has the ability to remain profitable, making it an attractive investment opportunity.

Buffett's investment in Occidental Petroleum is also consistent with his preference for investing in industries that he understands well. The oil industry has been a significant part of Berkshire Hathaway's portfolio for many years, with investments in companies like Exxon Mobil and Phillips 66. By investing in Occidental Petroleum, Buffett is further solidifying Berkshire's position in the oil sector and demonstrating his confidence in the industry's long-term prospects.

Occidental Petroleum's Recent Performance

Occidental Petroleum has been performing well in recent times, as evidenced by its 1st quarter 2023 results. The company reported cash flow from operations of $2.9 billion and cash flow from operations before working capital of $3.2 billion. Capital spending was at $1.5 billion, resulting in quarterly free cash flow before working capital of $1.7 billion.

Production for the company exceeded guidance by 40 Mboed, and full-year production guidance was raised to 1,195 Mboed. This strong performance has allowed Occidental to repurchase $752 million of common stock, accounting for over 25% of the $3.0 billion repurchase program. Additionally, $647 million of preferred stock was redeemed, initiating the next phase of the shareholder return framework.

OxyChem, a subsidiary of Occidental Petroleum, also performed well, approximating guidance with pre-tax income of $472 million and full-year guidance being raised to $1.5 billion. Earnings per diluted share were reported at $1.00, with adjusted earnings per diluted share at $1.09. These strong financial results indicate a promising future for Occidental Petroleum, making it an attractive investment for Berkshire Hathaway.

The Ongoing Slide in Oil Prices

The oil industry has been facing challenges in recent years due to a slide in oil prices. This has been caused by a combination of factors, including an oversupply of oil and a decrease in demand due to the rise of renewable energy sources. Despite these challenges, Occidental Petroleum has managed to maintain profitability thanks to its low break-even oil price of about $40 per barrel. This gives the company breathing room to make profits even if oil prices continue to slide, making it a resilient investment for Berkshire Hathaway.

Currently, WTI crude oil is trading at around $71, significantly down from the peaks above $110 in mid-2022. However, Occidental Petroleum has a break-even at $40 per barrel, which indicates a considerable profit base in the current conditions. During the pandemic, WTI crude oil was significantly trading below $40 from around March 2020 to May 2020. In general, WTI has been trading significantly above $40 for the most time since April 2004. Occential Petroleum is very likely remaining profitable for such a price environment.

The long-term Impact of COVID-19 on the Oil Industry

Up to around 2022, The COVID-19 pandemic has had a significant impact on the oil industry, with demand for oil plummeting as a result of lockdowns and travel restrictions. This has led to an oversupply of oil, further exacerbating the slide in oil prices. However, Occidental Petroleum has managed to weather these challenges, thanks in part to its low break-even oil price and strong financial performance.

As the world continues to recover from the pandemic and demand for oil inceases, Occidental Petroleum is well-positioned to benefit from the rebound in the oil market. This makes it a promising investment for Berkshire Hathaway, which has a long-term investment horizon and is known for its patience in waiting for the right market conditions to capitalize on its investments.

Historic References to Berkshire Hathaway's Investments

Berkshire Hathaway has a history of making successful investments in a variety of industries, such as Coca-Cola and American Express. These investments have generated significant returns for Berkshire over the years, demonstrating Warren Buffett's ability to identify undervalued companies with strong potential for growth.

However, not all of Berkshire's investments have been successful. The company has faced challenges with investments in IBM and Kraft Heinz, which have underperformed in recent years. This highlights the importance of conducting thorough due diligence and maintaining a diversified investment portfolio to mitigate risks.

The Future of Occidental Petroleum

Occidental Petroleum has a promising future ahead, thanks to its strong financial performance, low break-even oil price, and plans to reduce debt and increase shareholder returns. The company's recent performance has demonstrated its resilience in the face of challenging market conditions, making it an attractive investment opportunity for Berkshire Hathaway.

As the oil industry continues to recover from the COVID-19 pandemic and demand for oil increases, Occidental Petroleum is well-positioned to benefit from the rebound in the market. This makes it a promising long-term investment for Berkshire Hathaway and its shareholders.

Conclusion for Shareholders of Berkshire Hathaway

In conclusion, Berkshire Hathaway's investment in Occidental Petroleum is a historic move that demonstrates Warren Buffett's confidence in the company's future prospects ↗. Despite the challenges facing the oil industry, Occidental Petroleum has managed to maintain profitability and deliver strong financial results, making it an attractive investment opportunity.

Shareholders of Berkshire Hathaway should take comfort in the company's continued investment in Occidental Petroleum, as it signals a belief in the oil producer's long-term potential for growth ↗. As the oil industry recovers from the pandemic and demand for oil increases, Occidental Petroleum is well-positioned to benefit from the rebound in the market, making it a promising investment for Berkshire Hathaway and its shareholders.

References