Warren Buffett, known for his strategic investments and financial acumen, has recently found himself with a staggering amount of cash on hand. As chairman of Berkshire Hathaway, his focus has shifted to prudence in investing, citing that the company’s cash and Treasury holdings may reach upwards of $300 billion by the end of the current quarter. This ample liquidity comes in light of Buffett’s recent trend of divesting from several stocks in the portfolio without reinvesting those proceeds into new opportunities; in fact, he has sold more holdings than purchased over the past seven quarters.
Currently, one noteworthy investment on Buffett’s radar is Occidental Petroleum. This stock, a long-time favorite of Buffett, has recently hit its lowest point in two years. Remarkably, despite this decline, Buffett has refrained from increasing his shares in the company, even as prices hover around $50—considerably below his average purchase price of approximately $60.
Berkshire Hathaway invested $10 billion into Occidental’s preferred shares in 2019 and has come to appreciate the potential this stock holds in the energy sector, especially as the price of oil has fluctuated. With the recent decrease in crude oil prices—dropping about 15% since the third quarter—one must wonder why Buffett is not capitalizing on this opportunity.
Occidental’s vulnerability to oil price swings is a significant factor to consider. Unlike broader integrated oil companies, Occidental’s business model heavily depends on direct oil extraction from bedrock formations. As oil prices decrease, so too do the earnings that support its financial stability. The company is also faced with a considerable debt load, which its management is actively addressing through strategic asset divestments aimed at reducing a debt level of approximately $19.7 billion.
The current downturn offers a mixed bag of prospects. While Occidental has been proactive in streamlining its debt, investments are being redirected to prioritize debt reduction over stock repurchases. Buffett’s decision to hold off on expanding his investment in Occidental could stem from the uncertainty surrounding the energy market and its recent downturn.
Nevertheless, there are optimistic indicators for the company. With a significant portion of its operations located in the Permian Basin, Occidental is well-positioned to benefit when oil prices rebound. The future of carbon capture technology also promises a lucrative avenue for growth, as the company has recently secured a $650 million grant from the Department of Energy to develop a Direct Air Capture Hub in South Texas. This venture, paired with Buffett’s enthusiastic endorsement of the company’s carbon capture focus, signals potential for long-term growth despite current headwinds.
As a significant stakeholder, owning around 28% of Occidental’s common stock, Buffett’s existing shares yield an attractive 8% dividend return on his remaining $8.5 billion investment. Even though the current trading environment may lead some investors to consider buying in at a 10% discount compared to Buffett’s average price, it’s essential to weigh the risks involved.
Investors who are bullish on oil prices and intrigued by the multi-trillion-dollar potential of carbon capture technology might find Occidental Petroleum worth examining, especially given the current pricing dynamics.
Before making any investment choices, those interested should conduct thorough research and consider diverse perspectives. While Buffett’s current investment strategy may seem cautious, it underscores his ability to navigate market fluctuations with a long-term vision.
As exciting growth stories continue to emerge in the market, potential investors might also want to explore other opportunities. There are analysts who have identified several stocks that might outperform Occidental at this time, granting investors diverse paths to explore as they build their portfolios.
With ongoing shifts in the energy landscape and advancements in sustainable technologies, keeping a watchful eye on key players like Occidental Petroleum could serve investors well in the coming years.