What The Heck Does Buffett Know?

Buffett seems to know something about where energy prices are going, but what is it? Why is he taking such a large stake in Occidental Petroleum when the share price has been drastically underperforming the broader-based market?

Up just 9.4% in the past 12 months and 4.3% so far this year, OXY is a laggard relative to the S&P 500, which is already up 15.2% this year and 26.2% over the past 12 months.

Buffett is a hardcore capitalist so it seems like he’s leaving money on the table by continually pouring ever more money into Occidental Petroleum. Or is he? What does he know that the rest of the world hasn’t quite figured out yet? We explore.

Key Points

• Buffett is buying up a huge stake in Occidental for its high-quality assets in the Permian Basin and cost-efficient oil extraction.
• He values CEO Vicki Hollub’s debt-reduction strategy and the company’s leadership in carbon capture technology.
• Occidental’s generous dividends appeal to Buffett, who also sees the company as undervalued with significant future growth potential in a rising oil market.

Why Is Buffett Buying Occidental Petroleum?

As of about a week ago, Berkshire Hathaway owned about 29% of Occidental Petroleum, or around 255.3 million shares, worth approximately $15 billion. That makes Berkshire the largest shareholder of OXY, one of the world’s largest independent oil and gas producers.

There are a few likely reasons Buffett has taken such a strong interest in the company. For one, Occidental has a high-quality asset base, particularly in the Permian Basin, which is the largest U.S. oil-producing area. The company’s ability to extract oil at lower costs compared to its peers provides a competitive advantage that is likely to persist over the long-term. In other words, Occidental Petroleum likely has a moat in an industry that sells a commodity.

Buffett has also express great admiration for CEO Vicki Hollub, who has prioritized reducing debt and strengthening the firm’s balance sheet, a strategy that aligns well with Buffett’s investment philosophy to prudently manage capital.

Another string to the bow of Occidental is its position as a leader in carbon capture technologies, where it has ambitious plans to build the world’s largest direct air capture facility. This initiative not only aligns with global trends towards sustainability but also positions the company to benefit from potential carbon credits, making it a future-oriented investment.

Lastly, Occidental pays a generous dividend yield, which has historically been a significant factor in Buffett’s investment decisions. The consistent return on investment through dividends is attractive, especially in the energy sector that is notorious for price swings.

Does Buffett Have Special Insights?

Beyond these headline reasons for investing, does Buffett have special insights? We can speculate on a few that he may be betting on.

For one, Buffett might be anticipating a long-term stabilization or increase in oil prices, driven by increasing global demand as well as supply constraints. Investing in a cost-efficient producer like Occidental would be strategically sound in such a scenario.

With the ongoing energy transition, companies like Occidental that invest in carbon capture might be akin to call optionality in the form of new revenue streams. Buffett may be looking over the oil horizon and envisioning a future where these technologies play a crucial role.

A further factor is that The Permian Basin, being located in the U.S., offers geopolitical stability compared to other oil-rich regions. This might provide a secure long-term investment environment, which is often a critical factor in Buffett’s strategy.

Finally, Buffett is known for his value investing approach and looks for opportunities whereby the market has undervalued a company’s intrinsic value. Given the cyclical nature of the oil market, he likely views Occidental’s current market position as undervalued relative to its future cash flows and earnings potential.