Warren Buffett's Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%) has bought more shares of oil producer Occidental Petroleum (OXY 0.82%). The latest purchases have boosted Berkshire's stake in the company to 22.2%. Berkshire has the regulatory approval to acquire up to half of the oil company's outstanding shares.
Here's a look at what's likely fueling Buffett's investment in this oil stock.
Back for another helping after a brief break
According to regulatory filings, Berkshire Hathaway has recently purchased another 5.8 million shares of Occidental Petroleum for $355 million. That increased the company's stake in the oil producer from 21.4% to 22.2%. Berkshire now owns over 200 million shares worth about $12.2 billion. It's Berkshire's seventh-largest holding at 3.7% of its portfolio.
Buffett's company has amassed a massive stake in the oil company over a relatively short period. Berkshire started buying shares about a year ago. The company paused purchases about five months ago, but Berkshire is back in a buying mode these days.
What's fueling Buffett's growing bet on Occidental?
The outlook for oil prices is heating up
Oil prices are the primary catalyst behind Berkshire's bet on Occidental Petroleum and fellow oil producer Chevron. While crude oil prices have cooled down in recent months -- coinciding with Berkshire's buying pause -- they appear poised to heat back up this summer.
The International Energy Agency (IEA) expects oil demand to grow by 2 million barrels per day (BPD) this year to a record 101.9 million BPD. The IEA sees a demand resurgence in China as a big driver. In addition, jet fuel demand should rebound as global travel recovers near pre-pandemic levels.
Meanwhile, the IEA expects tight supply this year. It only anticipates output growing by 1.2 million BPD due to the impact of sanctions on Russian supply. These factors lead the IEA to conclude that demand could outpace supplies in the second half of the year. This outlook has many in the industry forecasting that oil prices could hit $100 a barrel again this summer.
Higher oil prices are a boon for Occidental
Resurgent oil prices would enable Occidental Petroleum to produce more free cash flow. That would give the company additional money to return to shareholders. Occidental recently boosted its dividend payment by another 38% and launched a new $3 billion share repurchase program.
Those growing cash returns position Occidental Petroleum to start redeeming Berkshire's preferred stock investment in the company. That would save the oil company money since it pays Buffett's company $800 million annually on that $10 billion investment used to fund its 2019 Anadarko Petroleum acquisition. While the redemption of its preferred stock investment would impact Berkshire's dividend income in the near term, it would give the company more capital to make new investments.
A hidden long-term upside driver
Oil prices are a big near-term driver of Berkshire's investments in Occidental Petroleum and Chevron. In addition, both companies have potentially significant long-term catalysts. They're emerging leaders in the carbon capture and sequestration (CCS) market.
Occidental Petroleum believes CCS could be a $3 trillion to $5 trillion global market in the coming years. Because of that, the company could eventually make as much money providing decarbonization services as it currently makes producing oil and gas.
Occidental is building the first of many direct air capture (DAC) projects that will capture carbon dioxide from the atmosphere for underground storage. While the first project has run into inflation-related cost increases and other delays, the company hopes to finish it by the middle of 2025. It's key to showcasing the commercial viability of the technology. Occidental is also working to develop several sequestration hubs around the country.
These catalysts could give the stock the fuel to continue rallying
Berkshire Hathaway continues to buy shares of Occidental Petroleum. A big driver is the near-term upside potential in crude prices as demand appears poised to grow faster than supply later this year. Meanwhile, Occidental has a potentially large-scale long-term upside catalyst from its CCS investments. Because of that, Buffett's investment in Occidental could continue to pay off if those catalysts play out as expected.
