How Berkshire's Bets on Chevron and Occidental Petroleum Paid Off in 2023

Attention Berkshire Hathaway shareholders! Discover how Warren Buffett's strategic investments in Chevron and Occidental Petroleum have paid off in 2023. From navigating global oil market dynamics to environmental considerations, this article offers a fascinating insight into the complexities of investment decisions and the potential for long-term value creation.

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Introduction

In the intricate tapestry of global investment strategies, Berkshire Hathaway's foray into the energy sector, particularly its bets on Chevron and Occidental Petroleum (Oxy), stands out as a testament to Warren Buffett's legendary acumen for strategic investments. The year 2023 has been pivotal, not just for Berkshire Hathaway but for the entire energy sector, marked by fluctuating oil prices, regulatory changes, and a global push towards sustainable energy sources. Amidst this backdrop, Chevron and Oxy have emerged as significant players in Berkshire's portfolio, contributing to its resilience and growth.

Warren Buffett, known for his penchant for value investing and an uncanny ability to foresee long-term trends, has once again demonstrated his investment prowess. The choice of Chevron and Oxy aligns perfectly with his investment philosophy, which often gravitates towards companies with strong fundamentals and the potential for sustained growth. This strategic decision is particularly noteworthy in the context of the global oil market dynamics in 2023, as outlined in the IEA report ⁸, which highlighted a complex landscape of declining oil demand growth, sharp supply contractions, and significant inventory reductions.

Chevron and Oxy's achievements in 2023 are not just a reflection of their operational excellence but also an indicator of their strategic importance to Berkshire Hathaway's investment returns. Analyzing these investments from both a financial and strategic perspective offers invaluable insights into Berkshire Hathaway's broader investment strategy, its implications for shareholders, and the economic and environmental context shaping these decisions. As we delve deeper into the performance of these investments over the year, it becomes evident that despite the challenges, Chevron and Oxy have not only weathered the storm but have also charted a course for sustainable growth and profitability.

Chevron's Strong Performance Despite Challenges

Despite facing a myriad of challenges in 2023, Chevron's performance ↗ has been a beacon of resilience and strategic foresight ↗. The company reported earnings of $2.3 billion in the fourth quarter of 2023, a significant achievement given the $1.8 billion of U.S. upstream impairment charges and $1.9 billion of decommissioning obligations from previously sold assets in the U.S. Gulf of Mexico ¹. These figures, while reflective of the hurdles faced, also underscore Chevron's robust operational framework and its ability to navigate financial headwinds.

Chevron's adjusted earnings of $6.5 billion in Q4 2023, beating analysts' estimates, further highlight the company's strong financial health and operational efficiency ⁴. This performance is particularly commendable in the context of the global oil market's volatility and the sharp decline in world oil supply noted in early 2023 ⁸. Chevron's strategic acquisitions, including PDC Energy, Inc., a majority stake in ACES Delta, LLC, and an agreement to acquire Hess Corporation, have been pivotal growth drivers, positioning the company for sustained expansion ¹.

The impact of foreign currency effects, which decreased earnings by $479 million, showcases the global nature of Chevron's operations and the financial intricacies it manages ¹². Despite these challenges, Chevron's commitment to shareholder value is evident in its record cash return of over $26 billion for the year, an 18 percent increase over the previous year's total ¹². This not only reflects Chevron's financial strength but also its dedication to rewarding its shareholders.

Chevron's production increase, with annual worldwide net oil-equivalent production rising to over 3.1 million barrels of oil-equivalent per day, led by 14 percent growth in the United States, signals a robust path forward ¹. This growth, coupled with Chevron's projection of a 10% increase in output in the Permian basin and a 4% to 7% increase in global output, underscores the company's strategic positioning for future sustainability and profitability ⁴. Noteworthy, Chevron achieved significant expansion milestones in 2023 including first oil at Mad Dog 2 in the Gulf of Mexico or first natural gas production production from the Gorgon Stage 2 development in Australia ³.

Chevron Fact	Value
Chevron's Adjusted Earnings	$3.45 per share in Q4
Profit for 2023	$21.3 billion, 40% decrease in full-year profits
Dividend Increase	8%
Oil and Gas Production	3.12 million barrels per day in 2023
Fourth Quarter Earnings	$6.45 billion, 18% decrease from previous year

However, the role of environmental costs and regulations on Chevron's operations cannot be overlooked. As the oil industry grapples with higher environmental costs and stricter regulations, Chevron's ability to adapt and innovate will be crucial for its future outlook ⁴. The company's strong performance in 2023, despite these challenges, is a testament to its resilience and strategic agility, making it a key player in Berkshire Hathaway's investment portfolio and a significant contributor to its investment returns.

Occidental Petroleum's Strategic Wins

In the competitive landscape of the energy sector, Occidental Petroleum (Oxy) has managed to carve out a series of strategic victories that have not only bolstered its financial standing but also positioned it as a forward-thinking player in the industry ↗. With an adjusted income of $710 million for the fourth quarter of 2023, Oxy's financial results are a testament to its operational and strategic prowess ⁵. These figures are especially compelling when considering the broader context of global oil demand fluctuations and market volatility.

A key factor in Oxy's success has been its operational excellence. The company exceeded its production guidance, with total company production reaching 1,234 Mboed (Thousand barrels of Oil equivalent a day), surpassing mid-point expectations by 8 Mboed ⁶. This overachievement is indicative of Oxy's efficient production operations and its ability to maximize output against a backdrop of global supply and demand shifts.

Strategic acquisitions have also played a pivotal role in Oxy's triumphs. The acquisition of CrownRock for $12 billion in cash and stock, alongside the closure of the Carbon Engineering acquisition, underscores Oxy's commitment to high-grading its domestic portfolio and advancing its low-carbon initiatives ⁵. These moves are not mere expansions but are strategic in nature, aimed at bolstering Oxy's core competencies while aligning with broader environmental and sustainability goals.

Reflecting confidence in its financial health and future prospects, Oxy announced a 22% increase in its quarterly dividend to $0.22 per share ⁵. This decision is a strong signal to shareholders about the company's robust financial standing and its commitment to returning value to its investors.

Oxy Q4 2023 Fact	Value
Operating Cash Flow	$3.2 billion
Quarterly Free Cash Flow before Working Capital	$1.1 billion
Total Company Production	1,234 Mboed
Adjusted Earnings per Diluted Share	$0.74 (total $0.7 billion)
Increased Quarterly Dividend	22% to $0.22 per share

Moreover, Oxy's focus on low-carbon initiatives is particularly noteworthy ↗. In an era where environmental sustainability is increasingly becoming a priority for stakeholders across the board, Oxy's strategic direction not only enhances its corporate responsibility profile but also positions it well for future regulatory landscapes and consumer preferences.

The market's response to Oxy's financial performance and strategic direction has been largely positive. With a year-end estimation of net earnings around $4 billion and a market cap hovering around $51 billion, Oxy's strategic wins in 2023 have solidified its standing as a formidable entity in the energy sector, capable of navigating the complexities of market dynamics while ensuring long-term value creation for its shareholders ⁶.

Berkshire Hathaway's Investment Strategy

Warren Buffett's Berkshire Hathaway has long been known for its strategic, long-term investment philosophy, and its moves in the energy sector in 2023 are no exception. The decision to increase stakes in Chevron and Occidental Petroleum (Oxy) by 14.37% and 8.74%, respectively, in the fourth quarter of 2023, reflects a deliberate and calculated bet on the energy sector's future ⁷ ↗. These investments, valued at approximately $18.8 billion in Chevron and $14.5 billion in Oxy, signify a bullish outlook on the oil and gas industry, despite the global shifts towards renewable energy sources.

The strategic exits from D.R. Horton Inc and Markel Group Inc, alongside reductions in holdings of HP Inc and Apple Inc, highlight Berkshire's adeptness at reallocating resources to maximize returns ⁷. This reallocation is not merely about shedding less promising stocks but is a strategic maneuver to concentrate investments in sectors with perceived higher growth potential and stability, such as the energy sector.

The composition of Buffett's portfolio, with increased focus on the energy sector, underscores a broader investment strategy that seeks to capitalize on global oil market dynamics. Considering the IEA's report, which forecasts a world oil supply increase to a record 103.8 mb/d in 2024, with non-OPEC+ providing 95% of the incremental barrels, Berkshire's investment in Chevron and Oxy appears to be a strategic move to leverage these market dynamics for substantial returns ⁸.

Furthermore, these investments are not just financial bets but are reflective of a belief in the companies' management, operational efficiencies, and strategic directions. Chevron's resilience and Oxy's strategic acquisitions and focus on low-carbon initiatives align with Berkshire Hathaway's investment philosophy that values not only financial returns but also long-term strategic vision and sustainability.

For Berkshire Hathaway shareholders, these investments in Chevron and Oxy offer a dual promise. Financially, they represent an opportunity for substantial returns in a sector that, despite global shifts towards renewables, remains fundamental to the world's energy supply. Strategically, they reflect Berkshire's commitment to investing in companies that are not only leaders in their sector but are also poised for future growth through strategic initiatives and sustainability efforts.

Berkshire Hathaway's investment strategy, characterized by its increased stakes in Chevron and Oxy, is a calculated move that leverages global oil market dynamics for financial gain while aligning with companies that demonstrate operational excellence and a commitment to future-oriented strategies. This approach not only promises to enhance Berkshire's portfolio returns but also positions it as a conglomerate that is adept at navigating the complexities of the global energy market, ensuring long-term value creation for its shareholders.

Global Oil Market Dynamics

The global oil market has experienced a tumultuous year, marked by significant shifts in demand, supply disruptions, and geopolitical tensions. According to the Oil Market Report - February 2024 by the International Energy Agency (IEA), global oil demand growth has shown signs of deceleration, moving from a robust 2.8 mb/d in 3Q23 to a more modest 1.8 mb/d in 4Q23 ⁸. This slowing momentum is particularly noteworthy against the backdrop of an ever-evolving energy landscape.

A trio of burgeoning economies—China, India, and Brazil—stands at the forefront of this demand growth, underscoring the pivotal role emerging markets play in shaping global oil dynamics ⁸. Their burgeoning energy needs not only fuel the demand but also present unique challenges and opportunities for industry giants like Chevron and Occidental Petroleum (Oxy).

The supply side of the equation has not been without its drama. January witnessed a sharp decline in world oil supply by 1.4 mb/d month-over-month, a consequence of an Arctic blast that hampered production in North America and further OPEC+ output cuts ⁸. This contraction in supply, coupled with the aforementioned demand dynamics, has created a volatile market environment.

Looking ahead to 2024, the IEA forecasts a tempering of world oil demand growth to an average of 1.2 mb/d, a stark contrast to the previous year's robust expansion ⁸. Concurrently, world oil supply is anticipated to surge by 1.7 mb/d, reaching a record 103.8 mb/d, with non-OPEC+ countries contributing a staggering 95% of this incremental supply ⁸. This shift towards greater supply, predominantly from non-OPEC+ nations, may recalibrate market dynamics and influence pricing strategies across the industry.

IEA Report Figure	Information
Global oil demand growth	Annual gains easing from 2.8 mb/d in 3Q23 to 1.8 mb/d in 4Q23
Top countries for oil demand	China, India, and Brazil
World oil supply in January	Sharp decline of 1.4 mb/d m-o-m
Refinery throughputs	Set to accelerate from a seasonal low of 81.5 mb/d in February
Global observed oil stocks	Plummeted by about 60 mb in January, with on-land inventories falling to their lowest level since at least 2016
ICE Brent futures	Rose by $5/bbl during January, trading at $83/bbl at the time of writing
Pace of growth in global oil demand	Eased sharply, with an apparent slowdown in China underpinning an 830 kb/d decline in consumption in the final quarter of the year
World oil demand growth forecast for 2024	Average of 1.2 mb/d, only half last year’s solid expansion
World oil supply for 2024	Set to increase by 1.7 mb/d to a record 103.8 mb/d, with non-OPEC+ providing 95% of the incremental barrels

A particularly striking revelation from the IEA report is the plummeting global observed oil stocks, which in January fell by about 60 mb, dragging on-land inventories to their lowest level since at least 2016 ⁸. This tightening of global inventories underscores the delicate balance between supply and demand in the oil markets.

The implications of these dynamics for Chevron and Oxy are profound ↗. The rise in ICE Brent futures prices to $83/bbl in January ⁸ is a testament to the volatile market conditions that have, in part, benefited these oil majors. For Berkshire Hathaway, the investment in Chevron and Oxy amidst these fluctuations has proven prescient, capitalizing on the companies' strategic positioning and resilience in the face of global market shifts.

Environmental Considerations and Future Outlook

The oil industry is at a critical juncture, facing increasing environmental costs and stringent regulations aimed at curbing carbon emissions ⁴. Chevron and Oxy are not immune to these challenges. Both companies have felt the impact of higher environmental costs, which have necessitated a strategic pivot towards sustainability and renewable energy initiatives.

Chevron's acquisition of a majority stake in ACES Delta, LLC, and its agreement to acquire Hess Corporation highlight its commitment to bolstering its renewable energy portfolio and reducing its carbon footprint ¹³. Similarly, Oxy's strategic transactions, including the acquisition of CrownRock and Carbon Engineering, underscore its dedication to advancing low-carbon initiatives and high-grading its domestic portfolio ⁵.

These moves are not merely responses to regulatory pressures but are indicative of a broader industry trend towards sustainability. The potential impact of global environmental policies on the operations and profitability of Chevron and Oxy cannot be overstated. As nations worldwide commit to ambitious carbon reduction targets, the oil industry must navigate a complex landscape of innovation, adaptation, and transformation. As outlined already, both companies have shown significant efforts in sustainability initiaties ³ ↗.

Technological innovation, particularly in carbon capture and renewable energy, will play a crucial role in enabling Chevron, Oxy, and their peers to adapt to this changing energy landscape. The long-term implications of these environmental considerations for Berkshire Hathaway's investments in the oil sector are significant. As the world gradually shifts towards greener energy sources, the ability of oil majors to balance financial performance with environmental responsibility will be paramount.

The environmental considerations and future outlook for Chevron, Oxy, and the broader oil industry are intertwined with global efforts to combat climate change. The path forward will require a delicate balance between maintaining growth and profitability while embracing sustainability and innovation. For Berkshire Hathaway, the investments in Chevron and Oxy not only reflect a belief in the companies' financial prospects but also an acknowledgment of their potential to lead in the transition towards a more sustainable energy future ↗. The importance of balancing financial performance with environmental responsibility, in line with Berkshire Hathaway's investment philosophy, has never been more critical.

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Conclusion

Berkshire Hathaway's big oil investment strategy in 2023 and beyond, particularly its increased stakes in Chevron and Occidental Petroleum (Oxy), reflects a calculated and strategic move to leverage global oil market dynamics for financial gain while aligning with companies that demonstrate operational excellence and a commitment to future-oriented strategies. The decision to increase investments in Chevron and Oxy, valued at $18.8 billion and $14.5 billion, respectively, underscores a bullish outlook on the oil and gas industry, despite the global shifts towards renewable energy sources.

The strategic significance of these investments within the broader context of Berkshire Hathaway's portfolio and investment strategy cannot be overstated. The choice to reallocate resources from less promising stocks to concentrate investments in sectors with perceived higher growth potential and stability, such as the energy sector, exemplifies Berkshire's adeptness at navigating the complexities of the global energy market. This approach not only promises to enhance Berkshire's portfolio returns but also positions it as a conglomerate that is capable of ensuring long-term value creation for its shareholders.

The challenges and opportunities facing Chevron and Oxy in the current global economic and environmental landscape are profound. The volatile market conditions, marked by significant shifts in demand, supply disruptions, and geopolitical tensions, have tested the resilience and strategic agility of these oil majors. However, their strong financial performance, operational excellence, and strategic initiatives, such as Chevron's acquisitions and Oxy's focus on low-carbon initiatives, position them well for future growth and profitability.

The potential implications for Berkshire Hathaway shareholders are significant. These investments offer a dual promise, financially representing an opportunity for substantial returns in a sector fundamental to the world's energy supply, and strategically reflecting Berkshire's commitment to investing in companies poised for future growth through sustainability efforts ↗. The multifaceted nature of investment decisions, balancing financial performance with strategic positioning and environmental responsibility, underscores the complexity and depth of Berkshire Hathaway's investment philosophy.

Looking ahead, the future outlook for Berkshire Hathaway's investments in the energy sector is intertwined with global efforts to combat climate change. As the world gradually shifts towards greener energy sources, the ability of oil majors to balance financial performance with environmental responsibility will be paramount. The investments in Chevron and Oxy not only reflect a belief in the companies' financial prospects but also an acknowledgment of their potential to lead in the transition towards a more sustainable energy future.

Warren Buffett's investment philosophy, exemplified through the investments in Chevron and Occidental Petroleum, underscores the importance of strategic investment decisions in achieving long-term value. As shareholders of Berkshire Hathaway, it is crucial to consider the multifaceted nature of investment decisions and the balance between financial performance, strategic positioning, and environmental responsibility. The investments in Chevron and Oxy offer a glimpse into the complexities of global market dynamics and the strategic foresight required to navigate them, ensuring long-term value creation for shareholders.

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