Occidental Petroleum: A Strong Investment for Berkshire 2022

We explore the relationship between Berkshire Hathaway and Occidental Petroleum, examining the reasons why the conglomerate invested in the oil and gas company and the benefits this investment has provided for shareholders. From Occidental's strong financial performance to its commitment to sustainable practices and low-carbon initiatives, this article provides a comprehensive analysis of the company's success and potential for future growth.

The article is based on Berkshire Hathaway's 2022 annual report with some updates / inclusions from Occidental Petroleum's annual report 2022.

Introduction

In recent years, Berkshire Hathaway has made a significant investment in Occidental Petroleum Corporation, a major player in the oil and natural gas exploration, development, production, and chemicals manufacturing sectors. With a 21.4% stake in Occidental's common stock, Berkshire Hathaway has positioned itself to reap the benefits of the company's strong financial performance and growth prospects. This article aims to provide a thorough analysis of the benefits this investment brings to Berkshire Hathaway shareholders, by exploring the historical context, financial performance, and future outlook of both companies. So, let's dive in and explore the fascinating story of this lucrative partnership.

Historical Background

To fully appreciate the significance of Berkshire Hathaway's investment in Occidental Petroleum, it is essential to take a step back and understand the history and evolution of both companies.

Berkshire Hathaway, a multinational conglomerate holding company, traces its roots back to the early 19th century with the founding of Berkshire Cotton Manufacturing Company in 1889. Over the years, the company underwent numerous mergers and acquisitions, eventually coming under the leadership of the legendary investor, Warren Buffett, in 1965. Since then, Berkshire Hathaway has transformed into an investment powerhouse, with holdings in various industries such as insurance, utilities, transportation, and consumer goods.

Occidental Petroleum, on the other hand, was founded in 1920 by Armand Hammer, a businessman with a keen interest in both the oil and chemical industries. Initially starting as a small exploration and production company in California, Occidental grew exponentially over the years, expanding its operations to cover the entire value chain of the oil and gas sector. Today, it is one of the largest oil and gas companies in the United States, with a significant global presence.

The relationship between Berkshire Hathaway and Occidental Petroleum is not a new one. Over the years, the two companies have had several interactions, with Berkshire Hathaway even providing critical financial support to Occidental during challenging times. One such instance was in 2019 when Berkshire Hathaway committed $10 billion to help finance Occidental's acquisition of Anadarko Petroleum, a move that significantly bolstered Occidental's position in the competitive oil and gas landscape.

As a result of this long-standing relationship, Berkshire Hathaway's investment in Occidental Petroleum reflects not only a strategic financial move but also a vote of confidence in the company's management and growth prospects.

The oil and gas industry has experienced numerous ups and downs throughout history, with factors such as geopolitical tensions, economic crises, and technological advancements playing crucial roles in shaping the sector's landscape. Both Berkshire Hathaway and Occidental Petroleum have proven their resilience and adaptability in the face of these challenges, consistently delivering value to their shareholders.

In recent years, the industry has faced increasing pressure to transition towards more sustainable energy sources, prompting companies like Occidental Petroleum to invest in low-carbon ventures and focus on environmental sustainability. This strategic shift aligns well with Berkshire Hathaway's long-term vision, further solidifying the rationale behind their investment in Occidental.

In summary, the historical context and shared experiences of Berkshire Hathaway and Occidental Petroleum provide a solid foundation for their current partnership. As we proceed to explore the details of this investment and its benefits for shareholders, it is essential to keep in mind the broader industry trends and challenges that have shaped the trajectory of both companies.

Occidental Petroleum's Business and Operations

Before delving into the specifics of Berkshire Hathaway's investment in Occidental Petroleum, it is essential to understand the company's core businesses and operations. As mentioned earlier, Occidental is involved in the oil and natural gas exploration, development, production, and chemicals manufacturing sectors. In addition to these activities, the company also has a significant presence in the midstream segment, which encompasses the purchase, marketing, gathering, processing, transport, and storage of oil, natural gas, carbon dioxide, and other products.

Occidental's operations are divided into three main segments: Oil and Gas , Chemical (OxyChem), and Midstream and Marketing . Each segment contributes to the company's overall success and financial performance, creating a diversified and resilient business model.

Oil and Gas: The Oil and Gas segment is responsible for Occidental's exploration, development, and production activities. In 2022, the company achieved multiple production milestones, including record well productivity in the Delaware Basin and record lateral lengths in multiple regions. These accomplishments, combined with the growth in proved reserves of over 300 million Boe in 2022, reaching 3.8 billion Boe, demonstrate the company's commitment to expanding its operations and securing its position in the industry.

Chemical (OxyChem): The Chemical segment, known as OxyChem, is involved in the manufacturing and marketing of basic chemicals and vinyls. In 2022, OxyChem had a record year in terms of pre-tax earnings, significantly contributing to Occidental's overall success. OxyChem's strong performance highlights the company's ability to capitalize on favorable market conditions and maintain a competitive edge in the chemicals manufacturing sector.

Midstream and Marketing: The Midstream and Marketing segment is responsible for Occidental's midstream businesses, which play a crucial role in supporting the company's upstream operations. This segment ensures the efficient transportation and storage of oil, natural gas, and other products, while also managing the purchase, marketing, and trading activities for these commodities. By integrating these services, Occidental can effectively manage the supply chain, reduce costs, and maximize the value of its products.

In addition to its core operations, Occidental is also investing in low-carbon ventures, such as constructing the world's largest Direct Air Capture (DAC) plant, expected to begin commercial operations in 2025. This investment reflects the company's commitment to environmental sustainability, as evidenced by its achievement of zero routine flaring in its U.S. oil and gas operations in 2022 and ongoing efforts to further reduce methane emissions.

To sum up, Occidental Petroleum's diversified operations across the oil and gas, chemical, and midstream sectors, combined with its focus on environmental sustainability and low-carbon ventures, create a robust business model capable of weathering industry challenges and delivering long-term value for shareholders. This comprehensive understanding of the company's operations will prove invaluable as we delve into the specifics of Berkshire Hathaway's investment in Occidental Petroleum and the benefits it brings to shareholders.

Berkshire Hathaway's Stake in Occidental Petroleum

Now that we have a solid understanding of Occidental Petroleum's business and operations, let's take a closer look at the details of Berkshire Hathaway's investment in the company and its financial implications.

As of September 30, 2022, Berkshire Hathaway owns a substantial 21.4% of Occidental Petroleum Corporation's common stock. This sizable stake allows Berkshire to benefit from Occidental's strong financial performance and participate in its growth story.

In addition to its common stock holdings, Berkshire Hathaway also has a significant investment in Occidental preferred stock. This investment has an aggregate liquidation value of $10 billion, providing Berkshire with a strong financial position in the company. The preferred stock accrues dividends at a rate of 8% per annum, offering a steady income stream for Berkshire Hathaway. It is important to note that this preferred stock is redeemable in 2029 at 105% of the liquidation preference plus any accumulated and unpaid dividends.

Berkshire Hathaway's investment in Occidental also includes warrants, which allow the company to purchase up to 83.86 million shares at an exercise price of $59.62 per share. These warrants provide Berkshire with the potential to further increase its stake in Occidental, depending on the company's stock performance.

Occidental Petroleum's Strong Financial Performance

Occidental Petroleum's robust financial performance in 2022 is a testament to the company's successful operations and growth strategy. In this section, we will analyze key financial metrics, including net earnings, pre-tax earnings, and revenues, as well as discuss the significance of the $3 billion share repurchase program, debt reduction, and credit rating upgrade for shareholders.

Analysis of Occidental's net earnings, pre-tax earnings, and revenues in 2022

Occidental's financial performance in 2022 was exceptional, with net earnings attributable to common shareholders reaching $10.777 billion for the first nine months of the year. This impressive figure highlights the company's ability to generate significant profits, even in a competitive and challenging industry landscape. Furthermore, the record year for OxyChem, a part of Occidental, contributed to the company's overall success, with pre-tax earnings reaching new heights in 2022.

In terms of revenues, Occidental also excelled, with total revenues and other income amounting to $28.769 billion for the first nine months of 2022. This strong revenue performance is an indication of the company's operational efficiency and market positioning.

Importance of the $3 billion share repurchase program for shareholders

The completion of Occidental's $3 billion share repurchase program in 2022 brought significant benefits for its shareholders. By repurchasing shares, the company effectively reduced the number of outstanding shares, leading to an increase in earnings per share (EPS) for existing shareholders and potentially boosting the stock price. This share repurchase program demonstrates Occidental's commitment to returning value to its shareholders and its confidence in the company's future prospects.

Overview of Occidental's balance sheet, debt reduction, and credit rating upgrade

Occidental's efforts to strengthen its balance sheet and reduce debt have been successful, with the company retiring more than $10.5 billion of debt in 2022, surpassing its target. This debt reduction not only improved the company's financial position but also resulted in estimated savings of more than $400 million per year in interest and financing costs. As a result, Occidental's balance sheet as of September 30, 2022, showed assets of $72.144 billion and liabilities of $43.424 billion, reflecting a solid financial standing.

The company's commitment to debt reduction and financial stability was recognized by Moody's Investors Service, which upgraded Occidental's senior unsecured credit rating to investment grade in March 2023. This upgrade signals confidence in Occidental's creditworthiness and financial health, further emphasizing the benefits of Berkshire Hathaway's investment in the company.

Now that we have covered Occidental Petroleum's strong financial performance, let's move on to the next section about Occidental's Proved Reserves and Production Milestones.

Occidental's Proved Reserves and Production Milestones

Occidental Petroleum's growth in proved reserves and the achievement of several production milestones in 2022 demonstrate the company's continued operational excellence and success in the oil and gas sector. In this section, we will examine the significance of these achievements for the company's future prospects and value creation for shareholders.

Growth in Occidental's proved reserves in 2022 and its significance

In 2022, Occidental's proved reserves grew by over 300 million barrels of oil equivalent (Boe), reaching a total of 3.8 billion Boe. Proved reserves represent a crucial metric for oil and gas companies, as they provide an estimate of the total amount of recoverable resources available for production. The growth in Occidental's proved reserves indicates the company's ability to discover, develop, and exploit new resources, which contributes to its long-term sustainability and growth potential.

The increase in proved reserves also demonstrates Occidental's success in expanding its resource base, despite the challenges faced by the oil and gas industry. This growth not only enhances the company's long-term prospects but also adds value for shareholders by increasing the potential for future revenue generation.

Record well productivity in the Delaware Basin and record lateral lengths in multiple regions

Occidental achieved multiple production milestones in 2022, including record well productivity in the Delaware Basin and record lateral lengths in various regions. These milestones showcase the company's expertise in employing advanced drilling and extraction techniques, which contribute to its efficiency and effectiveness in oil and gas production.

The record well productivity achieved in the Delaware Basin, which is located in West Texas and southeastern New Mexico, is particularly noteworthy. Occidental's operations in the Delaware Basin represent a significant portion of the company's overall production, and the achievement of record well productivity reflects the successful implementation of innovative technologies and operational strategies. The Delaware Basin has become one of the most active and profitable areas for oil and gas production in the United States, and Occidental's strong presence in this region further strengthens its position in the industry.

In addition to the Delaware Basin, Occidental achieved record lateral lengths in other regions, indicating its expertise and innovation in drilling and extraction methods. Longer lateral lengths allow for increased access to hydrocarbons and improved efficiency in the extraction process, which can result in lower production costs and higher profitability.

Importance of these milestones for the company's future prospects

The achievement of these production milestones reinforces Occidental's position as a leader in the oil and gas industry and underscores the company's commitment to operational excellence and innovation. The growth in proved reserves and the successful implementation of advanced drilling and extraction techniques position the company for continued success in the future.

These achievements also contribute to the company's ability to generate future revenue and profitability, benefiting shareholders in the long run. By improving operational efficiency and increasing production, Occidental can enhance its competitive position in the industry and capitalize on future opportunities.

Environmental Sustainability and Low-Carbon Ventures

Occidental Petroleum is committed to environmental sustainability and responsible resource management, as demonstrated by its achievements in reducing routine flaring and methane emissions. Additionally, the company has made significant investments in low-carbon ventures, including the construction of the world's largest Direct Air Capture (DAC) plant. In this section, we will examine Occidental's commitment to sustainable practices and the significance of its low-carbon initiatives for the company's future prospects and shareholder value.

Overview of Occidental's commitment to environmental sustainability

Occidental has made significant strides in reducing its environmental impact, particularly in terms of routine flaring and methane emissions. In 2022, the company achieved zero routine flaring in its U.S. oil and gas operations, contributing to a reduction in greenhouse gas emissions and demonstrating its commitment to responsible resource management.

In addition, Occidental has implemented several initiatives aimed at reducing methane emissions, including the use of advanced monitoring and detection technologies and the implementation of best practices in production and operations. These efforts not only benefit the environment but also help to reduce operational costs and improve efficiency.

Achievements in reducing routine flaring and methane emissions

Occidental's achievement of zero routine flaring in its U.S. oil and gas operations in 2022 is a significant accomplishment, as routine flaring is a common practice in the industry that results in the release of harmful greenhouse gases into the atmosphere. By eliminating routine flaring, Occidental has demonstrated its commitment to responsible resource management and environmental sustainability, while also reducing its greenhouse gas emissions.

Similarly, the company's efforts to reduce methane emissions are an essential part of its sustainability strategy. Methane is a potent greenhouse gas that contributes to climate change, and reducing methane emissions is crucial in mitigating the impact of the oil and gas industry on the environment. By implementing best practices and advanced technologies, Occidental is taking proactive steps to reduce its methane emissions and limit its environmental impact.

Investments in low-carbon ventures, including the world's largest Direct Air Capture (DAC) plant

Occidental's investments in low-carbon ventures are a crucial part of its sustainability strategy and demonstrate its commitment to innovation and leadership in the energy sector. The company's construction of the world's largest DAC plant, expected to begin commercial operations in 2025, represents a significant step towards achieving its sustainability goals.

DAC technology involves the capture of carbon dioxide directly from the air, providing a potential pathway for the reduction of greenhouse gas emissions. Occidental's investment in this technology positions the company at the forefront of low-carbon innovation and could represent a significant opportunity for future growth and profitability.

Significance of these initiatives for the company's future prospects and shareholder value

Occidental's commitment to sustainable practices and low-carbon initiatives is not only beneficial for the environment but also positions the company for long-term success and value creation for shareholders. By reducing its environmental impact and investing in innovative technologies and ventures, Occidental is strengthening its position in the industry and demonstrating its leadership in the energy transition.

These initiatives also align with the growing demand for sustainable practices and low-carbon solutions, positioning Occidental as a company that is well-suited to capitalize on future opportunities and contribute to a more sustainable energy landscape. By focusing on sustainability and innovation, Occidental is setting itself up for long-term success and creating value for its shareholders, which brings us to the next section.

Benefits for Berkshire Hathaway Shareholders

Berkshire Hathaway's investment in Occidental Petroleum offers several benefits for its shareholders, both in terms of direct financial returns and indirect value creation.

Firstly, Berkshire's after-tax earnings from Occidental in 2022 amounted to $258 million, contributing to the company's overall earnings and adding value for its shareholders. This figure showcases the immediate financial benefits of the investment in Occidental Petroleum, reflecting the company's strong performance in the oil and gas, chemical, and midstream sectors.

Secondly, the 8% per annum dividends on the preferred stock investment provide a steady income stream for Berkshire Hathaway. This income not only enhances the company's overall returns but also offers a measure of stability and predictability for shareholders.

Moreover, Occidental's robust financial performance, demonstrated by its net earnings attributable to common shareholders reaching $10.777 billion for the first nine months of 2022, further reinforces the value of Berkshire Hathaway's investment. This strong performance is also evident in Occidental's total revenues and other income for the same period, which amounted to $28.769 billion.

Another benefit for shareholders is the impact of Occidental's $3 billion share repurchase program, which was completed in 2022. By repurchasing shares, Occidental effectively reduced the number of outstanding shares, increasing the earnings per share (EPS) for existing shareholders and potentially boosting the stock price.

Occidental's commitment to reducing debt and improving its balance sheet is also an advantage for Berkshire Hathaway shareholders. In 2022, Occidental retired more than $10.5 billion of debt, surpassing its target and strengthening its balance sheet. This debt reduction resulted in estimated savings of more than $400 million per year in interest and financing costs. Additionally, Moody's Investors Service upgraded Occidental's senior unsecured credit rating to investment grade in March 2023, further emphasizing the company's improved financial position.

Lastly, Berkshire Hathaway shareholders stand to benefit from Occidental's strategic initiatives and investments in environmental sustainability and low-carbon ventures. As the world moves towards cleaner energy sources, Occidental's efforts to reduce methane emissions and invest in technologies like Direct Air Capture (DAC) demonstrate the company's commitment to remaining relevant and competitive in the future energy landscape. This forward-looking approach aligns well with Berkshire Hathaway's long-term investment philosophy, creating value for its shareholders in the long run.

Future Outlook and Synergies with Berkshire Hathaway Subsidiaries

As we consider the future outlook for Berkshire Hathaway's investment in Occidental Petroleum, it is crucial to explore potential synergies with other Berkshire subsidiaries, such as Berkshire Hathaway Energy (BHE). In the event that Berkshire Hathaway decides to acquire Occidental Petroleum in its entirety, numerous opportunities for collaboration and value creation could emerge, further enhancing the overall benefits for Berkshire Hathaway shareholders.

Berkshire Hathaway Energy, a subsidiary of Berkshire Hathaway, focuses on the generation, transmission, distribution, and sale of electric energy, as well as the production, transportation, and distribution of natural gas. BHE has a diverse portfolio of assets, including renewable energy sources like wind, solar, and hydroelectric power. This diversity in BHE's operations aligns well with Occidental's focus on environmental sustainability and low-carbon ventures, creating the potential for joint projects and initiatives.

One possible synergy could involve Occidental's carbon capture and storage (CCS) technology, specifically its Direct Air Capture (DAC) project. As BHE continues to invest in renewable energy and reduce greenhouse gas emissions, the integration of Occidental's CCS capabilities could help BHE achieve its sustainability targets more efficiently.

Conclusion

Throughout this comprehensive analysis, we have delved into the multifaceted relationship between Berkshire Hathaway and Occidental Petroleum, examining the historical context, business operations, financial performance, and potential future synergies between Occidental and other Berkshire subsidiaries. This thorough exploration has highlighted the myriad ways in which Berkshire Hathaway's 21.4% stake in Occidental Petroleum benefits its shareholders and creates value for both companies.

The historical context of the oil and gas industry and the shared experiences of both Berkshire Hathaway and Occidental Petroleum have laid the foundation for their enduring partnership. Their long-standing relationship reflects not only a strategic financial alliance but also a mutual trust and confidence in each other's management and growth prospects.

Occidental's diversified operations across the oil and gas, chemical, and midstream sectors, coupled with its focus on environmental sustainability and low-carbon ventures, provide a robust business model capable of withstanding industry challenges and delivering long-term value for shareholders. Berkshire Hathaway's substantial stake in the company, including common stock, preferred stock, and warrants, offers various financial benefits and opportunities for value creation. Berkshire Hathaway shareholders stand to benefit from Occidental's strong financial performance, steady income stream from preferred stock dividends, share repurchase program, debt reduction, and improved credit rating. Furthermore, Occidental's commitment to environmental sustainability and low-carbon initiatives aligns with Berkshire Hathaway's long-term investment philosophy, ensuring value creation for shareholders in the future.

Looking ahead, potential synergies between Occidental Petroleum and other Berkshire Hathaway subsidiaries, such as Berkshire Hathaway Energy, could further enhance the benefits of this partnership. By exploring collaboration opportunities in areas like carbon capture and storage technology, both companies can leverage each other's strengths and expertise to drive innovation and accelerate the transition towards a more sustainable energy landscape. This collaboration could result in increased efficiency, reduced greenhouse gas emissions, and the achievement of sustainability targets, all of which contribute to the long-term value proposition for Berkshire Hathaway shareholders.

In conclusion, the Berkshire Hathaway-Oxy partnership is a shining example of the power of long-term, value-driven investing. With a keen eye for opportunities and a steadfast commitment to creating lasting value, both companies have consistently delivered results for their shareholders. As Occidental Petroleum continues to innovate and evolve in the ever-changing energy industry, Berkshire Hathaway's investment in the company is well-positioned to reap the rewards, benefiting its shareholders for years to come. By examining the intricate relationship between these two companies, we can appreciate the immense potential that lies ahead and the bright future that awaits Berkshire Hathaway and Occidental Petroleum.