Warren Buffett has been buying bunches of Occidental Petroleum stock. Will he buy the whole thing?
That is the question that some investors are asking after the aggressive purchases by Berkshire Hathaway (Ticker: BRK/B) during the past two weeks of Occidental Petroleum (OXY) stock.
Berkshire now owns 118.3 million shares of Occidental, a 12.7% stake, worth $6.9 billion after buying nearly 90 million shares of the big energy company since March 2, based on a filing late Friday .
It's very unusual for Buffett, who oversees Berkshire's $350 billion equity portfolio, to buy shares in a company so actively and openly. Berkshire's buying has helped drive up Occidental's stock price by over 30% in March to $57.95 on Friday, outpacing the rest of the broader energy sector. Berkshire shares hit a record Friday and the Class B stock ended at $326.60, up 0.4% in the session.
Berkshire has been stymied in the search for what Buffett has called an "elephant"-sized acquisition —or any sizable deal, for that matter—since it paid over $30 billion for Precision Castparts in 2016. That deal has been a disaster for Berkshire due to the fallout in the commercial aerospace industry due to the pandemic. But more than anything, Buffett is price-conscious, which may be the main reason he hasn't done a deal.
Nor does his Occidental purchases seem to be about getting more exposure to the energy sector. If that was the case, Buffett could have bought more shares of Chevron (CVX), which Berkshire already owns, and not have impacted Chevron's stock price too much. He wouldn't have had to report the purchases publicly within two business days, either, as he must do now with Occidental as a 10% holder.
Why would Occidental potentially appeal to Buffett?
He knows the company well after having invested $10 billion in Occidental preferred stock, which pays a lush 8% dividend yield, in 2019 when Occidental CEO Vicki Holub was seeking quick financing in a bidding war with Chevron for Anadarko Petroleum, which Occidental won thanks in part to the Berkshire investment . Berkshire also got 83.9 million Occidental warrants for free as part of that deal, which were struck at $59.62 a share.
Occidental is also the right size. The company is now valued at $54 billion which makes it very digestible for Berkshire, given its nearly $150 billion in cash.
Occidental's valuation is still reasonable assuming oil prices don't collapse from the current $110 per barrel. The stock trades for less than 12 times projected 2022 earnings of about $5 a share and that estimate could prove low given the recent surge in energy prices. In a recent note, Morgan Stanley analyst Devin McDermott wrote last week that the entire oil and gas sector looked appealing and that Occidental was discounting an oil price of about $61 a barrel against the 24-month "strip," or average forward price over the next two years, of $93 a barrel.
Buffett has no qualms about investing in the energy industry, unlike some socially conscious investors.
At Berkshire's annual meeting last year, Buffett was asked about the morality of its holding in Chevron and he replied:
"I mean Chevron is not an evil company in the least. And I have no compunction about owning—in the least about owning Chevron." Berkshire vice chairman Charlie Munger added: "You can imagine 2 things. A young man marries into your family. He's an English professor, at say Swarthmore or he's—he works for Chevron. Which would you pick? I'd take the guy from Chevron."
A Berkshire deal for Occidental might appeal to Occidental's board after more than two years of dealing with activist investor Carl Icahn, who recently exited his stake in the company. And a Berkshire bid likely wouldn't generate the kind of antitrust objection that a takeover offer by Chevron or Exxon Mobil would precipitate.
There's precedence. Berkshire accumulated a 20% stake in Burlington Northern Santa FeBurlington Northern Santa Fe by 2008, and Buffett waited until its stock got hit after the financial crisis to reach a deal in 2009 to buy the whole railroad company.
If oil prices pull back and so does Occidental stock, Berkshire might offer to pay $70 or $75 a share in cash for Occidental—still below its 2018 high of $87. At $70 billion, such a deal would be very doable for Berkshire. Occidental Petroleum stock has fallen 5.7% to $54.65 at 6:15 a.m. in premarket trading.
A transaction would have to be friendly since Berkshire doesn't do hostile deals. Buffett also prefers to pay cash and not issue Berkshire stock. Buffett has said Berkshire won't participate in corporate auctions—although that could change if the right deal comes along.
Occidental produces about 1.2 million barrels of oil equivalent daily and has been an industry leader in carbon capture. The company was burdened by high debt from its 2019 purchase of Anadarko Petroleum, but it has been rapidly paying that down thanks to the strength in energy prices. Last month, Occidental CEO Vicki Holub said the company aims to get its net debt down to under $25 billion by the end of the first quarter. The shares are up from a low of under $10 in 2020.
Buffett likes U.S.-focused businesses and Occidental gets about 80% of its energy production domestically.
Buffett normally purchases shares quietly and steadily over time as he did with Berkshire's largest equity holding, Apple (AAPL), which Berkshire bought from late 2016 into 2018. Buffett can be secretive. He sometimes asks—and receives-regulatory approval to keep Berkshire's equity purchases secret for a period of time, as he did when Berkshire was buying Chevron in 2020.
The noisy purchases of Occidental could mean that Buffett has more on his mind than simply holding a passive stake in the company.