Buffett's Bet on Occidental Petroleum

Berkshire's stake could soon surpass a key level with important implications. Could this be a prelude to Buffett making an offer to acquire the company?

“Now it’s quite apparent, I think, that we want — we’re very happy — we should be very happy — that we can produce 11 million barrels a day, or something of the sort, in the United States, rather than being able to produce none and having to find 11 million barrels a day somewhere else in the world to take care of keeping the American industrial machine working.”

— Warren Buffett, April 30, 2022

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The World Still Needs Petroleum

The geopolitical events of 2022 have shattered the notion that the world economy can function without fossil fuels. It is more clear than ever before that petroleum products will remain a necessity for a long time to come. Having reliable access to such energy sources is crucial for economic security. Placing a country’s energy security in the hands of potentially hostile foreign powers can have severe consequences.

As Warren Buffett points out, it is very good news that the United States has the capacity to produce a majority of the ~20 million barrels per day of petroleum that the country consumes. In fact, the United States was the top crude oil producer in 2021 at 14.5% of worldwide production, ahead of Russia, Saudi Arabia, Canada, and Iraq.

Source: U.S. Energy Information Administration

There has been a great deal of political pressure in the United States to reduce the country’s reliance on fossil fuels in favor of renewable energy. However, this is a multi-decade process regardless of the shifting political winds. As the world transitions to renewable energy, having the optionality provided by petroleum resources in the ground is unquestionably a major asset for the United States compared to countries, such as the member states of the European Union, that are more reliant on imports.

Warren Buffett has often said that making investments based on macroeconomic or geopolitical factors is very difficult and should be avoided. However, it is difficult to view his recent investments as unrelated to the geopolitical events of 2022. Russia invaded Ukraine on February 24 and Berkshire’s purchases of Occidental Petroleum common stock began on February 28. This doesn’t seem like a coincidence.

This article summarizes Berkshire’s recent investments in the common stock of Occidental Petroleum based on the company’s SEC filings. In addition, it is interesting to consider the implications of Berkshire exceeding 20% ownership of Occidental since there are some accounting and tax effects above that threshold. There has also been speculation that Berkshire could make an offer to acquire Occidental and it is worth considering how likely this is to occur.

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Buffett’s Bet on Oil

Warren Buffett has been putting Berkshire’s money behind his conviction in the future prospects of oil. Although the media has focused more on Berkshire’s growing investment in Occidental Petroleum, Berkshire actually has a larger position in Chevron with 159,178,117 shares held as of March 31, 2022 which are worth ~$22.9 billion as of July 21, 2022. Since Berkshire has not breached the 10% ownership level for Chevron, the company is not required to file SEC disclosures for new purchases. It is possible that Berkshire’s stake in Chevron has grown since March 31.

In contrast, Berkshire’s investments in Occidental exceeded the 10% threshold in March triggering a series of SEC disclosures. This was followed by Mr. Buffett’s statements regarding the purchase at the 2022 Berkshire Hathaway annual meeting which took place on April 30. Since that time, Berkshire has continued to add to its Occidental position and now owns approximately 19.4% of the company.

At the annual meeting, Mr. Buffett made extended comments regarding his purchase of more than 14% of Occidental over a period of just two weeks. He presented a slide showing his purchases of Occidental and I have excerpted part of his comments:

Source: 2022 Berkshire Hathaway Annual Meeting

“That shows how we bought what became — well, we bought in two weeks, or thereabouts, 14% of Occidental Petroleum. And you’ll say, “Well, how can you buy 14% of a company in two weeks?” And it’s more extreme than that, because if you look at the Occidental proxy, you’ll see that — the standard names — BlackRock index funds, State Street index funds, basically, Vanguard index funds, and then one other firm, Dodge & Cox.

If you take those four entities — and they’re not going to buy and sell stock — they may get their own little — so they own 40% of the company, roughly, those four firms. And they didn’t do anything during this period. So now you’re down to 60% of the Occidental Petroleum Company that’s even available for sale.

Occidental’s been around for years, and years, and years. Big company, all kinds of things. And with 60% of the stock outstanding, I go in and tell Mark Millard, this fellow that is 30 feet away from me or so, and I say in the morning to him, you know, “Buy 20% and take blocks, or whatever it may be.” And in two weeks, he buys 14% out of 60%.”

Mr. Buffett was making a broader point about how speculative market participants have become in recent years. To be able to accumulate so many shares of Occidental in a short period of time demonstrates that the prior owners were likely short-term speculators rather than long-term investors.

At the time of the annual meeting, Berkshire owned 136,373,000 shares of Occidental, all purchased between February 28 and March 16. It is interesting to look to the source data filed with the SEC during that period as well as additional purchases made in May, June, and July which are summarized below.