This Warren Buffett favourite is also the only multibagger among Berkshire's top stocks

Famed Wall Street investor Warren Buffett has been steadily snowballing his stake in Occidental Petroleum (Oxy) in what could be his largest-ever acquisition. And, this week again, Berkshire Hathaway scooped up another 5.99 million shares of the oil giant for $368 million, boosting its stake to nearly 21% after the oil company’s shares lost about a fifth of their value in less than a month (down 18.4%).

The conglomerate is Oxy’s largest shareholder. Following the recent purchase, Berkshire NOW owns about 194.4 million Occidental shares worth approximately $12 billion, based on the stock’s closing price of $61.41 on Wednesday.

This is the Nebraska-based company’s first purchase since it won approval from the US regulator in August to buy as much as 50% of Oxy’s shares.

Interestingly, despite the recent fall in prices, Occidental Petroleum is the only multibagger among the top Buffett stocks, including Apple (a Buffett favourite), Coca-Cola, Bank of America Corp, Chevron, American Express, Kraft Heinz, BYD, Moody’s Corporation, US Bancorp, and HP.

The scrip has jumped 98% year-to-date (YTD) and delivered 104.5% returns to investors in the past year. It also has a better 1-year return, compared to Tesla, Apple, Amazon, Microsoft, Alphabet, and Netflix at a time of complete chaos in the markets.

Even as US stocks are battling a bear market, energy stocks have been dominating the list of S&P 500 gainers so far this year, with Oxy at the top of the gainers’ chart, defying the S&P 500, which has already corrected 22.5% this year.

Why are shares rising?

Following Russia’s invasion of Ukraine earlier this year, energy prices have soared. That trend was bad news for consumers, but an opportunity for energy sector profits.

Though crude prices have whipsawed this year — from hitting $120/bbl in early June to dropping to $86/bbl recently — they are still around 13% higher for the year, making the sector one of the few bright spots in the market this year.

Occidental has more than doubled in 2022, beating market indices, driven by Buffett’s steady buying and high oil prices.

Another factor has been the oil major’s improving financials. Rising oil prices helped the company to increase its cash flow and reduce debt substantially. In Q2, the company posted a net income of around $3.56 billion, compared to a net loss of $97 million in the year-ago quarter while its revenue jumped 79.1 per cent.

Why is Buffett interested in Occidental Petroleum?

Berkshire’s chairman and CEO helped Occidental in 2019 when Oxy was in a bidding war with Chevron to buy Anadarko. At the time, Berkshire purchased $10 billion in the company’s preferred stock as well as warrants to buy 83.9 million shares of common stock.

The preferred shares carry an 8% (or $800-million) annual dividend that the company has paid out partly in stock and cash since Buffett’s initial investment.

But, the value-investor began adding to his Occidental holdings in the first quarter of 2022 after reading through the oil major’s annual report, thereby gaining confidence in the company’s leadership and growth story.

“What Vicki Hollub was saying made nothing but sense. And I decided that it was a good place to put Berkshire’s money,” Buffett said about Occidental’s CEO during Berkshire’s annual meeting. With no end in sight to the Ukraine conflict, the value investors likely anticipates the favourable energy climate will continue for the foreseeable future.

Buffett claims to be a realist in the debate around fossil fuels, with some on Wall Street clamouring for an equitable, climate-friendly market approach . “People that are on the extremes of both sides are little nuts,” he said at a Berkshire shareholder meeting in 2021.

The business magnate has always said people should not buy stocks unless they expect to hold them for a long time, and Oxy checks most of Buffett’s investment boxes — financial fortitude and growing dividends.

The recent additional purchase has stoked speculation that Buffett might try to buy the entire company and can quickly move to buy a further stake because it holds warrants to buy 83.9 million more shares at $59.62 apiece.

Buffett’s move suggests confidence in the long-term oil price story as his company is investing heavily in the oil sector this year. He is also a major investor in Chevron, which is up over 30 per cent YTD. Berkshire bumped its stake in Chevron too, buying $20-billion worth of shares.

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