The simple and complicated story behind Buffett’s massive oil purchase: Morning Brief

As the old EF Hutton ad said: When Warren Buffett talks, they say people are listening.

But when Buffett spoke about Occidental Petroleum (OXY) at the Berkshire Hathaway (BRK-A) annual meeting on April 30, how many really heard what the Oracle of Omaha was saying?

If anyone skipped that part, investors aren’t losing interest now, as Berkshire owns nearly 20% of the company.

Buffett’s investment in Occidental Petroleum is both simple and complicated.

Simple: “What [Occidental CEO] Vicki Hollub was saying it just makes sense,” Buffett told shareholders earlier this year. “And I decided that was a good place to put Berkshire’s money.”

Elementary, my dear Buffett. Speaking of his speech, Buffett bought Occidental stock seemingly every day.

Buffett’s Berkshire Hathaway has been buying shares of Occidental Petroleum at a rapid pace in recent months. (Source: Markets Insider/SEC Filings)

There is a more complex story, however, with a stunning backstory that stretches back years for Buffett and decades for Occidental.

Oxy Pete, as the company is known, was founded 102 years ago in California. Smaller than the fully integrated Seven Sisters – BP, Shell, Chevron, Gulf, Texaco, Exxon and Mobil – Oxy enjoyed an outsized reputation largely due to company patriarch Armand Hammer, the company’s CEO from 1957 to 1990.

Colorful doesn’t begin to describe Hammer.

A friend to myriad world leaders, Hammer was dubbed “Lenin’s chosen capitalist” because of his deep connection with Russia. Hammer opened up Libya and locked horns with Gaddafi. He tried to buy Church & Dwight, owners of Arm & Hammer baking soda, because the name of this product was almost eponymous. Hammer was an avid art collector, made illegal campaign contributions to Richard Nixon, and the actor, Armie Hammer, is his great-grandson.

Armand Hammer and his private jet before leaving Le Bourget on March 28, 1977, France.  (Photo by Bertrand LAFORET/Gamma-Rapho via Getty Images)

Armand Hammer in France around 1977. (Photo by Bertrand LAFORET/Gamma-Rapho via Getty Images)

“Occidental made a name for itself in the late 1950s as an independent international company seeking oil drilling and production opportunities,” says a University of Iowa professor. Priest Tyler. “Hammer was a huge risk taker, not only making deals with foreign governments, but also doing mergers and acquisitions.”

Oxy today, however, is a far cry from what it was in Hammer’s day.

CEO Vicki Hollub is a mining engineer who rose through the corporate ranks after coming on board when Oxy bought Cities Service in 1982. National oil and gas production now accounts for 83% of its activity and with $29 billion in annual revenue, Oxy is the 43rd largest oil producer in the world and 11th in the United States

Oxy has a significant stake in the Permian Basin, thanks in part to its acquisition of Anadarko in 2019, when Buffett entered the scene.

That year, Oxy made a hostile bid on Anadarkowhich had already agreed to be acquired by Chevron (CVX).

Oxy went on the lookout for funding and history Buffett told CNBC goes like this: “I got a call mid-afternoon from Brian Moynihan, the CEO of Bank of America. And he said they were involved in the financing of the Western deal and the Westerners would like to talk to me.

Buffett agreed to give Hollub $10 billion in cash in exchange for preferred stock and warrants giving Berkshire a 10% stake in Oxy. Buffet said at the time the bet was essentially a bet on a rise in the price of oil. A bet that would be interrupted by the pandemic.

After the COVID-19 pandemic swept the world, crude oil prices crashed. (And turned negative in the spring of 2020.) Occidental’s stock fell to $10, which undoubtedly hurt Buffett.

As part of his preferred stock investment, Buffett was receiving common stock dividends from Occidental. Who, in the second quarter of 2020, Buffett sold whole.

Selling Buffett only made things worse for Hollub, and by the fall of 2020 the stock had fallen below $9. But as the global economy and the oil market recovered, shares of Oxy also rallied to around $40 earlier this year. And Buffett’s view of Oxy seemed to change again.

As Buffett told shareholders at this year’s annual meeting, things changed when Buffett read Oxy’s Q4 2021 earnings call and annual report.

“Vicki Hollub was saying what the company has been through, and where it is now, and what it plans to do with the money,” Buffett told shareholders earlier this year. As stated at the beginning of this article, these were the comments that “only made sense”.

So Buffett asked Mark Millard, who runs Buffett’s stock trades at Berkshire Hathaway, to start buying. “And in two weeks,” Buffett said, “he buys 14% out of 60%[ofOccidental’ssharesthatwereoutstanding”[desactionsd’Occidentalquiétaientencirculation”[ofOccidental’ssharesthatwereoutstanding”

This spring and summer, Buffett has strengthened his position and now owns 19.4% of Oxy, just below the 20% threshold that would require Occidental’s results to be consolidated in Berkshire’s quarterly figures.

According to data from people of Business Intern, Buffett’s weighted average cost is about $53 per share. On Friday, Occidental closed at $61.06.

So: what is Buffett’s endgame? Will he buy all of Oxy? Who knows.

Berkshire and Occidental declined to comment.

It could be that Buffett, who always appreciates a business with a robust return on equity (ROE), likes the work Hollub has done at Oxy, which returned 16% on equity last year and is heading towards 30. % this year, according to data from Value Line.

Should you buy Oxy? Again, who knows.

Your views on climate change could inform your decision. Sure, Oxy takes steps to offset carbon, but you don’t buy ice cream if you’re a big believer in diets.

‘If you’re negative on carbon-based fuels, Oxy probably isn’t the one,’ says market analyst and trader Bob Iaccinowho owns the stock.

As for buying it just because Buffett owns it, Iaccino has his share too.

“I wouldn’t buy something because Warren Buffett did,” Iaccino said. “And I wouldn’t buy something because Warren Buffett didn’t.”

Again: easy and complicated.

This article was featured in a Saturday edition of the Morning Brief on July 23, 2022. Get the Morning Brief delivered straight to your inbox Monday through Friday by 6:30 a.m. ET. Subscribe

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