According to the latest 13F filings, Warren Buffett’s holding company Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) increased its stake in just two companies. One of those companies is insurance operator Chubb Ltd. The other is an energy giant that, quite frankly, Buffett is obsessed with. He’s a big fan of how the company is being run. After reviewing the company’s annual report, Buffett told CNBC: “I read every word, and…this is exactly what I would be doing.”
Buffett clearly loves this company
Buffett has long been a big believer in good management teams. But they need to be paired with good businesses. “When a management with a reputation for brilliance tackles a business with a reputation for bad economics,” he once famously remarked, “it is the reputation of the business that remains intact.”
When it comes to good management teams, Buffett has been impressed by oil and gas producer Occidental Petroleum (NYSE: OXY). When asked about the company’s CEO, Vicki Hollub, Buffett highlighted that she is “running the company the right way.”
But what about the underlying business economics? In last year’s letter to investors, Buffett detailed exactly what he loved about Occidental’s business model. “We particularly like its vast oil and gas holdings in the United States, as well as its leadership in carbon-capture initiatives,” he wrote. Hollub has positioned the company for success through a series of wise acquisitions and ruthless capital management. This has turned the company into a free cash flow machine. Shares currently trade at a free cash flow yield of 8.5%.
In early 2019, it was first revealed that Berkshire had taken a position in the company through a financing deal that granted Berkshire warrants and preferred shares. Then, in 2021, Berkshire purchased common equity in Occidental. At the time, the stake totaled around 91 million shares worth roughly $5 billion. Berkshire also still held warrants to buy an additional 83.9 million shares. Those warrants were earned under the previous deal in which Berkshire helped Occidental finance its acquisition of Anadarko, another oil and gas producer.
Since that initial position, Berkshire has continued to acquire more shares. Today, its stake has nearly tripled, to about 250 million shares worth roughly $15 billion. More than four million of those shares were purchased in the last quarter alone. Berkshire still holds most of its warrants, too, which are now in the money.
Buffett’s massive bet on Occidental shouldn’t be surprising to anyone paying attention. In 2022, Berkshire received regulatory approval to eventually take a 50% or greater stake in the company. And in his 2023 letter to investors, Buffett added a surprising note to his comments on Occidental, writing that he believes Berkshire’s stake in the company will likely be maintained “indefinitely.” He put Occidental in the same category as American Express and Coca-Cola — two companies that have remained in Berkshire’s portfolio for decades.
Should you buy Occidental stock?
Buffett is undeniably taking the long view with Occidental stock. But there’s also no denying that he’s already made a handsome profit on his common equity investment. Since Buffett started buying, shares have more than doubled in value, while Berkshire’s warrants and preferred shares also increased in value.
The easiest profits may have already been made, but that doesn’t rule out Occidental for many investors. The company’s cash flow gives it operational flexibility to strategically acquire competitors, buy back stock, support a 1.5% dividend, avoid taking on debt at historically high interest rates, and invest in long-term initiatives like carbon capture. That means its future will ultimately depend on two things: Management and oil prices.
From an operational standpoint, Occidental has a relatively impressive management team. It has managed to grow output, continually reduce drilling costs, and attract long term backers like Buffett and Berkshire. There is no denying, however, that as an oil and gas producer, Occidental’s share price will be heavily affected by the direction of oil and gas prices. Many analysts believe oil prices will rise over time, and Buffett seems similarly optimistic. But potential investors need to have the same conviction, no matter how much they admire Occidental’s management team or strategy.
Should you invest $1,000 in Occidental Petroleum right now?
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American Express is an advertising partner of The Ascent, a Motley Fool company. Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Warren Buffett Is Buying Shares of This Company. Should You Do the Same? was originally published by The Motley Fool
