Investors far and wide take note of Warren Buffett's stock purchases, but over the last few years, those purchases have been relatively muted. Yet the Oracle of Omaha recently turned heads with some very large and aggressive purchases of oil company Occidental Petroleum (OXY 0.89%).
No doubt, Occidental gets the majority of its earnings from oil and gas. However, there's more to Occidental than just a bet on higher oil prices. Here are a few things you might not know about Buffett's new holding.
Its chemicals segment is also a play on the housing market
Not only is Occidental diversified in terms of its oil and gas basins throughout North America and the Middle East, but it also has substantial chemical-production operations. OxyChem, as that segment is called, achieved significant profits last year, with its highest earnings in 30 years. In 2021, OxyChem generated $1.54 billion in segment operating income, making up 26% of Oxy's total segment income before interest and corporate overhead costs.
OxyChem makes a variety of chemicals, but the largest output is polyvinyl chloride (PVC), which is used to make plastic piping in housing and building materials. Other products provide raw materials for a variety of soaps, cleansers, disinfectants, and other uses. So not only is Occidental benefiting from tight oil supply now, it's also seeing rising PVC prices and benefiting from the favorable tailwinds in the housing market, which is very undersupplied.
The chemicals business is profitable year in and year out, although it does bounce around from year to year. That makes it a great stabilizer for the company in a potential down market for oil. Though we're far from that today, as Buffett eyes the long term for his holdings, OxyChem is a great supplementary asset to have.
Image source: The Motley Fool.
Occidental is a leader in carbon-capture technology
Now that Occidental is getting the balance sheet in order as oil profits are rolling in, management is upping its investment in its low-carbon ventures portfolio. This mainly consists of carbon-capture technology Occidental is developing.
Carbon-capture technology, if commercially successful, could be a game-changer that allows the world to decarbonize while still burning fossil fuels. While the technology is in a late development stage, Occidental has expertise in this area, having used carbon injections in its enhanced oil recovery (EOR) processes. In fact, according to its annual report, Occidental "holds the first two ... monitoring, reporting and verification plans for geologic sequestration through EOR production" approved by the Environmental Protection Agency.
In its recent earnings presentation, Occidental divulged plans and a construction schedule for its first direct air capture plant, which will take one million tonnes of carbon dioxide out of the air annually and sequester it. The plant, constructed through Occidental's 1PointFive development company, should initiate construction in the second half of 2022 and become operational in 2024.
If successful, carbon capture could become a significant business for Occidental as the world aims to stave off global warming.
The company will hold a detailed presentation on its low-carbon ventures segment on Wednesday, March 23. Tune in on Occidental's investor-relations page.
How big will Buffett's Oxy bet get?
After Buffett's buying binge over the last couple of weeks, Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) owns more than 13% of Occidental stock. Factoring in the warrants Berkshire got with its preferred stock several years ago, its stake in Occidental would amount to 22% of the latter company.
Sure, it's an opportune time to play Occidental as a leveraged bet on higher oil prices. Management says it will generate $225 million annualized for every $1-per-barrel increase in oil prices. In 2021, Occidental realized just $66.14 per barrel of oil, and its oil and gas operations generated $4.1 billion in operating income.
With oil prices now more than $40 higher, Occidental has the potential to generate $9 billion in incremental profits, assuming the company averages $106 per barrel through the year. Notably, the last of Occidental's oil price hedges rolled off in the fourth quarter, so the company will now be able to realize the full benefits of the current pricing environment.
While that's a nice short-term bump, Buffett likely chose Occidental as both a play on oil prices and as a commitment to a lower-carbon future, by way of its low-carbon ventures segment. And the chemicals segment also gives the company the ability to weather a down market in oil, should that come around.
With a downside buffer from chemicals, near-term profit increases due to booming oil and gas prices, and long-term potential with carbon-capture technology, it's no wonder Buffett thinks of Occidental as an oil company with staying power.
