Warren Buffett, despite expressing caution about the 2023 stock market, continues to make strategic moves in his investment portfolio. The Oracle of Omaha, who has been a net seller of stocks in 2023, recently added $589 million to one of Berkshire Hathaway’s top holdings, Occidental Petroleum (NYSE: OXY).
Buffett’s total equity sales for Berkshire Hathaway reached $32.8 billion by the end of September, while stock purchases amounted to $9.1 billion during the same period. Despite these selling trends, Buffett’s recent SEC filings reveal the acquisition of 10.5 million shares of Occidental Petroleum, bringing Berkshire’s total stake in the company to 27.2%. This purchase aligns with Occidental’s announcement of its $12 billion acquisition of CrownRock, boosting confidence in Buffett’s positive outlook on the deal.
Buffett’s Shifting Energy Investment: Berkshire Hathaway’s connection with Occidental dates back to its $10 billion capital contribution related to Occidental’s 2019 Anadarko acquisition. In return, Berkshire received 100,000 preferred shares of Occidental, offering an 8% dividend. Occidental faced challenges after the acquisition, including a bidding war with Chevron and the impact of COVID-19. Buffett initially sold Occidental’s common stock during the pandemic but resumed purchasing in March 2022, making significant acquisitions in subsequent quarters.
Buffett’s shift in energy investment is evident in his decreased holdings of Chevron. While Berkshire made a substantial investment in Chevron in Q1 of 2022, Buffett has been selling off shares for four consecutive quarters. While Chevron remains Berkshire’s largest holding in the energy sector, Occidental is gradually closing the gap.
Why Buffett is Favoring Occidental Over Chevron: Several factors could contribute to Buffett’s decision to sell Chevron shares and buy Occidental. One possibility is his preference for Occidental’s valuation, although the EV/EBITDA ratio is comparable between the two companies. The more significant difference lies in the price-to-free-cash-flow ratio, with Chevron trading at 14 times and Occidental at 8.3. Notably, Occidental’s obligation to pay an 8% dividend on Berkshire’s preferred shares influences its cash flow dynamics.
Occidental’s recent move to acquire CrownRock for $12 billion, largely funded by debt, adds complexity to its financial outlook. While the acquisition is expected to generate additional cash flow, depending on oil prices, it introduces risks.
Investors considering Occidental should weigh the potential upside, given its strong position in the Permian basin, against the inherent risks associated with the acquisition and oil market dynamics. Buffett, expressing confidence in Occidental’s management and the West Texas region’s prospects, signals optimism amid the uncertainties.
Conclusion: Buffett’s strategic moves in the energy sector highlight the dynamic nature of his investment decisions. As Occidental becomes an increasingly significant part of Berkshire Hathaway’s portfolio, investors may find value in understanding the rationale behind Buffett’s choices and assessing the associated risks and opportunities.
