Warren Buffett doused cold water on the speculation that Berkshire Hathaway (BRK.A 0.20%)(BRK.B 0.26%) had set its sights on its next elephant. At Berkshire's annual meeting, he emphatically told investors that the conglomerate wouldn't be buying the rest of oil giant Occidental Petroleum (OXY 1.23%) that it doesn't currently own. His company had amassed a 23.5% stake in the oil producer and had received regulatory approval to boost it to as much as 50%.
Those comments might have investors who followed Buffett into the oil stock wondering if it's time to sell. Here's a look at what Buffett said about Occidental and the thesis for owning the oil producer now that a buyout is seemingly off the table.
NYSE: OXY
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Drilling down into Buffett's comments about Occidental Petroleum
Berkshire has been buying shares of the oil company hand-over-fist in the past year. Occidental has grown into the seventh-largest position in Berkshire Hathaway's portfolio. Shares are worth nearly $13 billion and are 3.8% of the portfolio's total value.
With Buffett's company holding over a quarter of Occidental's outstanding shares and getting regulatory approval to purchase up to half the company, many investors speculated that Berkshire would eventually acquire Occidental Petroleum. The investment seemed to mirror Berkshire's path to acquiring BNSF. Berkshire built up a 22.6% stake in the railway before acquiring the entire company in a $26.4 billion deal in 2010.
NYSE: BRK.B
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Buffett addressed the idea Berkshire would buy Occidental at its recent annual meeting. He told investors, "There's speculation about us buying control; we're not going to buy control." Buffett then quipped, "We wouldn't know what to do with it." Berkshire's CEO also said that while "we will not be making any offer for control of Occidental," his company "love[s] the shares we have." He further stated: "We may or may not own more in the future but we certainly have warrants on what we got on the original deal on a very substantial amount of stock around $59 a share, and warrants last a long time, and I'm glad we have them."
Berkshire got those warrants when it made a $10 billion preferred stock investment in Occidental in 2019. That deal helped fund its purchase of Anadarko Petroleum. The warrants enable Berkshire to buy up to $5 billion of Occidental's stock at around $59 a share (which happens to be right around the recent price). Occidental Petroleum recently started buying back those preferred shares (which yield 8%).
With a buyout off the table, what's the Occidental Petroleum bull thesis?
Speculation that Buffett might buy Occidental had fueled a big rally in its stock last year. Shares of the oil company more than doubled in 2022, -- leading the S&P 500 -- driven by Buffett's purchases and higher oil prices. They've lost some steam in recent months as oil prices cooled off. Meanwhile, with Buffett ending the acquisition speculation, shares could lose more ground as investors who hoped he'd offer a premium to acquire the entire company bail on their position.
However, an acquisition by Buffett never seemed to be the driving factor behind the purchases. His company has also been gobbling up shares of Chevron (CVX 1.27%). Berkshire owns 7% of the oil giant's outstanding shares, which are currently worth over $21 billion. That makes Chevron Berkshire's 5th largest holding.
NYSE: CVX
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With sizable positions in two oil stocks, it seemed more like Buffett and his team were making a bold bet on higher oil prices following Russia's invasion of Ukraine. While that thesis hasn't held up as well as expected due to concerns about a slowing global economy, Buffett has ample reasons to remain bullish on oil prices.
The International Energy Agency (IEA) expects resurgent jet fuel and Chinese oil demand to drive record oil demand this year. Meanwhile, supplies will remain tight, especially after OPEC+ announced a surprise production cut last month. That could cause a wide gap between supply and demand later this year, potentially driving up oil prices.
In addition to its upside to oil prices, Occidental is an emerging leader in carbon capture and storage (CCS) technology. That could be an enormous business for the company. It sees CCS growing to a $3 trillion-$5 trillion global industry. Occidental believes it could one day make as much money from CCS as it currently produces from its oil and gas business.
Buffett's bull thesis remains intact
Investors who bought Occidental Petroleum hoping for a Buffett buyout were likely disappointed to learn that won't happen. While they might opt to sell, the reasons Buffett has been buying shares of the oil giant remain. Several catalysts could send oil prices higher. In addition, the company has lots of upside to the emerging carbon capture and storage sector. Continuing to hold the shares could pay big dividends over the longer term.
