Occidental Petroleum (OXY -0.15%) is a $53.3 billion exploration and production company headquartered in Houston, Texas. It isn't the size of Apple, Bank of America, American Express, Coca-Cola, or Chevron (CVX 0.37%) -- Berkshire Hathaway's (NYSE: BRK.A) (NYSE: BRK.B) top five holdings (all have a market cap over $150 billion).
Yet, Berkshire has invested over $15 billion in Oxy, owning a staggering 28.2% of the entire company. Five years ago, Berkshire owned no Oxy stock.
At this rate, it would be easy to assume that Buffett and his team would buy out the whole company. But Buffett sent a clear message that this wouldn't be the case. Here's why.
Image source: Getty Images.
What Buffett wrote
Buffett wrote the following in his 2023 letter to shareholders:
At year-end, Berkshire owned 27.8% of Occidental Petroleum's common shares and also owned warrants that, for more than five years, give us the option to materially increase our ownership at a fixed price. Though we very much like our ownership, as well as the option, Berkshire has no interest in purchasing or managing Occidental. We particularly like its vast oil and gas holdings in the United States, as well as its leadership in carbon-capture initiatives, though the economic feasibility of this technique has yet to be proven. Both of these activities are very much in our country's interest.
He then spent the next few paragraphs discussing the shale revolution, U.S. energy independence, and why the oil and gas industry is good for America. He also praised Oxy's management.
Under Vicki Hollub's leadership, Occidental is doing the right things for both its country and its owners. No one knows what oil prices will do over the next month, year, or decade. But Vicki does know how to separate oil from rock, and that's an uncommon talent, valuable to her shareholders and to her country.
In sum, Buffett likes being a participant in Oxy but not necessarily managing the business. The hands-off approach makes sense once factoring in Berkshire's total holdings.
The big picture
Oxy is the sixth-largest public equity holding in Berkshire's portfolio. The fifth-largest is Chevron. Also, as a newcomer, the position has been built up in less than four years. In fact, Chevron was the only significant stock purchase Berkshire made in the fourth quarter of 2023 -- besides repurchasing Berkshire Hathaway shares. Berkshire increased its Chevron stake by 14.4%, marking the first time Berkshire bought the stock in over a year. Berkshire now owns 6.8% of Chevron.
Combined, Berkshire's stakes in Chevron and Oxy are worth over $34 billion, nearly as much as Berkshire's second-largest public equity holding -- Bank of America. Yet Berkshire's true exposure to energy extends far beyond that through its 92% stake in Berkshire Hathaway Energy (BHE). It's hard to put a price tag on BHE, but some estimates say it is worth $90 billion.
Analyzing Oxy within the context of Berkshire's overall exposure to oil and gas and utilities, particularly in conjunction with its Chevron stake, makes it easier to understand why Berkshire doesn't want to go full throttle and buy out Oxy.
A high-risk/high potential reward play in the oil and gas space
Not only is Oxy a smaller company than many of Berkshire's other top holdings, but it is also far riskier. Oxy is known for supporting an expensive capital spending program, leveraging its balance sheet with debt to accelerate growth or afford an acquisition, and being extremely optimistic about the output of the Permian Basin in West Texas and Eastern New Mexico.
CEO Vicki Hollub has been a somewhat controversial executive. In retrospect, Oxy's purchase of Anadarko Petroleum in 2019 (when it outbid Chevron) was a bad deal, especially considering how much cheaper it would have been to buy Anadarko in the years that followed. But the deal and leverage helped Oxy post a phenomenal performance in 2022 and, to a lesser extent, 2023.
The outperformance allowed Oxy to pay down debt and improve its balance sheet. But in December, Oxy announced it would buy Permian producer CrownRock L.P. with, you guessed it, mostly debt.
Hollub's ultra-aggressive style in a cyclical and highly volatile industry couldn't be more different than stodgy Buffett stocks like Coca-Cola. By comparison, Chevron has an incredible balance sheet with barely any debt for its size and a diversified business that spans more than just upstream production.
Berkshire is heavily invested in oil and gas
Berkshire's notable increase in its Chevron stake, paired with Buffett's statement that Berkshire isn't interested in buying out Oxy, showcases that Berkshire is bullish on U.S. oil and gas, just not solely through the lens of an aggressive upstream producer.
I could see Berkshire simply holding its existing Oxy stake and slowly increasing its stake in Chevron, another major, or maybe even another Permian producer like ConocoPhillips or EOG Resources.
The headline news may indicate that Berkshire isn't bullish on Oxy or oil and gas. But once we dig deeper into the inner workings of the overall portfolio, it becomes more apparent that the decision isn't so much about the industry as it is about position sizing and allocation.
