Warren Buffett's Berkshire Hathaway (BRK.A 0.99%) (BRK.B 0.91%) recently bought even more shares of Occidental Petroleum (OXY 0.56%). A filing with the Securities and Exchange Commission (SEC) showed that Berkshire scooped up another 7.9 million shares of the oil stock in recent days.
That followed news earlier this month that Buffett's company had resumed buying shares of the oil stock after pausing for several months.
Here's what could be fueling the buying binge.
Back to building a position
Berkshire Hathaway amassed a more than 20% stake in Occidental Petroleum last year, making the oil stock a top-10 position. But Berkshire pressed pause on buying shares last September.
It resumed its purchases this month. With the latest buys, Berkshire has amassed more than 208 million shares, worth about $11.8 billion. That's 23.1% of the company's outstanding shares. It has the regulatory authority to buy up to half of Occidental's outstanding stock.
What's fueling the latest purchases?
Timing the market
A big driver of the investment in Occidental are higher oil prices. They helped fuel a significant rise in the oil company's share price last year. The oil price increase generated more free cash flow, which the company used to repay debt and return more money to shareholders via dividends and share repurchases.
Interestingly, Berkshire stopped buying shares when their price seemed to start getting ahead of the fundamentals. As this chart shows, Occidental's stock kept rallying into the fall even though oil prices had cooled off (coinciding with Buffett's buying pause):
But in more recent months, shares have descended more than 20% from their peak. Because of that, they trade at a more reasonable valuation relative to where oil prices are these days.
A catalyst on the horizon
Buffett also seems to be making a bet that oil prices could be due for a bounce. Crude prices have fallen almost 15% this year and were recently below $70 a barrel. Weighing on oil is the growing concern we could experience an economic downturn this year, which could hurt oil demand.
While a recession could affect consumption, it might not be enough to overcome the expected gap between supply and demand that appears poised to form later this year. The International Energy Agency (IEA) currently expects oil demand to grow by 2 million barrels per day (BPD) this year, reaching a record 102 million BPD. That's a 300,000 BPD increase from its forecast in January.
Fueling the growth is rebounding air traffic and Chinese demand. Meanwhile, the IEA also expects supplies to rise this year, but sees them starting to fall short of demand in the second half of this year as China's recovery takes hold.
That outlook sets the stage for a potential rebound in oil prices this summer. Many in the industry expect that crude prices could approach the triple digits.
Higher oil prices would enable Occidental to generate more cash. Given its disciplined approach to capital spending and much-improved balance sheet, it would likely return most of that windfall to shareholders.
Those cash returns would eventually include redeeming some of Berkshire's $10 billion preferred-stock investment in Occidental that helped fund the oil company's 2019 purchase of rival Anadarko. That combination of higher oil prices and increased cash returns could drive Occidental's stock higher this year.
Buffett seems to see a buying opportunity
After a pause of several months, Berkshire Hathaway is back to buying shares of Occidental Petroleum. The timing is interesting because it coincides with a more recent decline in the stock price, which had held up even though crude prices had cooled off.
With both of those down now, Buffett seems to think it's a good time to buy, especially given the potential gap between oil supplies and demand forecast for later this year. It could end up being a well-timed wager that oil prices rebound, taking Occidental's stock up with them.
