Buffett Buys Occidental to Play the Oil Bull Market - Stockxpo - Grow more with Investors, Traders, Analyst and Research

Buffett Buys Occidental to Play the Oil Bull Market

While


Warren Buffett
(Trades, Portfolio) has gained worldwide fame as a stock picker, many of his most profitable business deals have been loans rather than equity purchases.

A shrewd strategy

When you buy a stock, there is a chance your investment thesis will turn out to be wrong and you will lose money.

With loans, on the other hand, large-scale lenders can make a steady, high return as long as the business they issue the loan to can eventually pay it back with interest.

This is the strategy that Buffett’s Berkshire Hathaway (

BRK.A, Financial)(BRK.B, Financial) took with Occidental Petroleum (OXY, Financial) in 2019, when the conglomerate agreed to lend $10 billion to help fund Occidental’s $38 billion acquisition of competitor Anadarko.

While equity investors protested the acquisition on account of the overwhelming amount of debt it would saddle the already-struggling company with, Buffett was content with lending to the company in exchange for a combination of preferred stock with an 8% dividend yield and warrants to buy common stock. This way, the downside risk was relatively limited and the conglomerate could still turn a hefty profit, especially once business conditions improved.

Shifting gears

In 2019, Buffett did build an 18,933,054-share equity stake in Occidental, but when the Covid-19 pandemic hit and tanked oil prices, causing Occidental to make some of its loan payments in shares rather than cash, the guru ditched the equity stake and retreated to the safety of the preferred stock yield.

The Oracle of Omaha seems to have changed his mind about the stock this year as oil prices rise, though. According to GuruFocus Real-Time Picks, a Premium feature, the guru’s conglomerate acquired 91,162,995 shares of Occidental’s common stock between March 1 and March 4 (shares traded for an average price of $46.79 on March 1 and $56.15 on March 4).

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A closer look at the SEC filings reveals that a form 3 was reported on March 1 for filing date March 4, detailing Berkshire’s acquisition of 29,811,177 Occidental shares. This buy brought Berkshire’s total ownership of the company above the 10% mark, thus necessitating the form 3 filing. Form 3 must be filed within 10 days after a person’s holdings exceed 10% of any class of a company’s registered equity securities.

On March 2, a form 4 was reported for filing date March 4, revealing that Berkshire bought another 61,351,818 shares of Occidental between those two dates. As of the form 4 filing, Berkshire still owned its 100,000 shares of Occidental’s Series A preferred stock as well as 83,858,848.81 warrants to purchase shares of common stock at an exercise price of $59.624.

Is Buffett bullish on oil?

Buffett’s conglomerate now owns close to 17% of Occidental, including 9.76% of its outstanding common shares. It’s notable that Buffett is buying more of the stock just below the exercise price for the outstanding warrants.

If the guru simply wanted to take the easy profits and get away from Occidental entirely, he would likely only need to wait a little longer for the stock to rise above the exercise price as oil prices continue their rapid upward trend, boosting the stocks of oil producers all around.

As we can see in the below chart, energy has been the best-performing sector in the U.S. over the past year, a trend that is likely to continue as the invasion of Ukraine by Russia threatens European energy security.

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Instead of sticking with just the more secure income from its previous investments in Occidental, Buffett’s conglomerate has now built a sizeable equity stake in the company.

Buffett also boosted Berkshire’s Chevron investment in the fourth quarter of 2021, adding 33.24% to the holding for a total stake of 38,245,036 shares.

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That being said, energy stocks only represented 1.36% of Berkshire’s equity portfolio as of its most recent 13F filing for the fourth quarter of 2021, and the Occidental buy won’t have moved the needle much in that respect, as the new equity position only added 1.45% to the equity portfolio.

In general, Buffett prefers to avoid speculating on commodity prices, but with Occidental’s revenue and earnings per share on the rise, it’s possible that he could see this as a value opportunity.

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