Over the last few years, Warren Buffett’s Berkshire Hathaway has been steadily acquiring shares in Occidental Petroleum. Buffett has commended the performance of Occidental’s CEO, Vicki Hollub, along with the company’s substantial oil and gas assets in the U.S. Currently, Occidental Petroleum ranks as Berkshire Hathaway’s sixth-largest investment.
This summer, Buffett shared with CNBC, “I read every word, and thought this is precisely the path I’d choose. The CEO is leading the company in the right direction.”
Buffett could be attracted to Occidental due to its potential benefits from increasing oil prices. Recently, Occidental announced its plans to purchase CrownRock for about $12 billion.
This acquisition will provide immediate cash flow advantages for Occidental, but it will also introduce extra debt and increase its exposure to high-decline shale assets. Should oil prices rise from approximately $70 per barrel today to $75 per barrel—reflecting a 7% growth—Occidental anticipates that its free cash flow per share will surge from $4.22 to $5.27, translating to a 25% enhancement. The company exhibits significant leveraged upside potential in a rising price atmosphere.
Conversely, Occidental’s leverage also comes into play during a price downturn. Since April, the company’s stock has dropped by nearly 30%, primarily due to a nearly 20% dip in oil market prices during the same timeframe. After this decline, Occidental shares are valued at 11.5 times the expected free cash flow based on $70 oil prices.
Buffett’s Interest in Occidental
This valuation appears reasonable for those optimistic about the long-term prospects of oil pricing. Investors might consider reinforcing their positions should the oil market experience further downturns, which may put additional pressure on Occidental’s stock.
Occidental possesses several financial strategies to implement in this context, such as pausing its share repurchase program and potentially reducing its 1.8% dividend. When oil prices rebound, Occidental is poised to take advantage. Berkshire Hathaway has obtained regulatory clearance to acquire up to 50% of Occidental, although it currently holds 27.2%.
Two primary considerations might lead Buffett to substantially increase his position in Occidental before the conclusion of 2024:
1. Occidental’s current pricing is lower compared to earlier this year when Berkshire last acquired shares. Berkshire also possesses warrants that permit the purchase of Occidental shares at a predetermined price, lessening valuation concerns.
2. The operational landscape for oil producers, including Occidental, may improve under shifting political circumstances that could lessen regulatory burdens. While it is not guaranteed that Buffett will aggressively purchase Occidental stock before the end of 2024, the chances appear promising.
The concrete details will emerge in mid-February when Berkshire Hathaway’s regulatory submissions for Q4 disclose its stock acquisitions.
