Warren Buffett’s big oil bet ‘a conviction that high prices could be here to stay’: Argus
Earlier this month Warren Buffett’s Berkshire Hathaway received regulatory approval to buy up to 50% of $US67bn oil giant Occidental (NYSE:OXY).
It had already increased its stake rather rapidly this year to ~20%, and experts now say a takeover looks likely.
“I think it is likely that Buffett will buy the whole thing eventually,” David Kass, a finance professor at the University of Maryland’s Robert H. Smith School of Business told CNBC.
“The 50% limit may have been set to receive FERC approval for a non-controlling stake.
“He clearly plans to purchase additional shares.”
While Occidental’s share price outperformance — at its highest since the firm’s first ill-fated bid for Anadarko in April 2019 — may give him cause to pause, Argus says a takeover cannot be ruled out.
In 2019, Occidental paid $US55bn for oil firm Anadarko – which included $US10bn from Buffett himself — after a hugely expensive bidding war with Chevron. Then COVID hit.
“The surge in oil prices has helped Occidental make speedy progress in repairing its balance sheet,” it says.
“The firm hiked its dividend and resumed share buy-backs after exceeding near-term debt reduction targets and its free cash flow reached a record high of $4.2bn in the second quarter.”
The share price has gained 132% year-to-date, and ~600% from recent lows in March 2020.
Argus believes that Warren Buffett’s wager is as much a bet on the company’s ambitious plans to scale up carbon capture as on a conviction “that high oil prices could be here to stay”.
“Occidental was the first major US producer to lay out plans to hit net-zero emissions — including Scope 3 emissions from customers using its production — by 2050,” it says.
“It is relying heavily on new technology that will pull CO2 from the atmosphere and bury it underground.
“Construction of Occidental’s first so-called direct air capture plant is due to start in the Permian basin this quarter.
“The eventual goal is to roll out as many as 70 such facilities around the world by 2035, helping other industries curb their emissions.”
At Berkshire’s annual meeting in May, Buffett praised chief executive Vicki Hollub and said the catalyst for his interest in the stock was an analyst presentation he read.
“What Vicki Hollub was saying made nothing but sense,” Buffett said. “And I decided that it was a good place to put Berkshire’s money.”
The ‘Oracle of Omaha’s’ high profile bet on Occidental has apparently encouraged a crowd of small investors to follow suit.
OXY now regularly features on apewisdom.io, sentiment tracker that tracks the most popular stock boards on Reddit and 4Chan, and VandaTrack, “which provides daily data on retail investors’ trading activity and social chatter across all U.S listed stocks and ETFs”.