Billionaire investor Warren Buffett's wager on US oil firm Occidental Petroleum is as much a bet on the company's ambitious plans to scale up carbon capture as on a conviction that high oil prices could be here to stay.
US energy regulator Ferc has authorised Berkshire Hathaway, Buffett's investment vehicle, to boost its holding in the shale independent to as much as 50pc. It had been snapping up shares on the secondary market all year, amassing a stake of just over 20pc. Buffett's interest may have been piqued by the company's recovery from its ill-timed $55bn takeover of Anadarko Petroleum three years ago, which saddled Occidental with tens of billions of dollars in debt, shortly before the pandemic sent oil prices crashing.
But it also may have as much to do with the company's ambitious plans to navigate the energy transition. Occidental was the first major US producer to lay out plans to hit net-zero emissions — including Scope 3 emissions from customers using its production — by 2050. It is relying heavily on new technology that will pull CO2 from the atmosphere and bury it underground. Construction of Occidental's first so-called direct air capture plant is due to start in the Permian basin this quarter. The eventual goal is to roll out as many as 70 such facilities around the world by 2035, helping other industries curb their emissions.
And chief executive Vicki Hollub recently hailed the US' Inflation Reduction Act, which expanded tax credits for such technologies, as a "net very positive bill" for Occidental. "I could see some benefit to Occidental on carbon sequestration efforts — which they're already doing — because of sweeteners" in the legislation, CFRA Research analyst Stewart Glickman says.
Buffett's long bet on Occidental comes on the heels of famed activist investor Carl Icahn's exit. Icahn, who had lobbied for Hollub's ouster following the Anadarko deal, sold the remaining part of his 10pc stake earlier this year. Buffett already had more than a passing acquaintance with Occidental before this year. He stumped up $10bn to help the company over the finishing line in the takeover battle for Anadarko in 2019, in return for preferred stock and warrants.
At Berkshire's annual meeting in May, Buffett praised Hollub and said the catalyst for his interest in the stock was an analyst presentation he read. "What Vicki Hollub was saying made nothing but sense," Buffett said. "And I decided that it was a good place to put Berkshire's money." While approval for a bigger stake has stirred speculation that Buffett may launch a full takeover bid, Occidental's share price outperformance — at its highest since the firm first bid for Anadarko in April 2019 — may give him cause to pause, although it cannot be ruled out.
Let the free cash flow
Another major appeal is that Occidental is finally making good on the Anadarko deal, bolstering its position in the top-performing Permian basin of west Texas and southeastern New Mexico. The surge in oil prices has helped Occidental make speedy progress in repairing its balance sheet. The firm hiked its dividend and resumed share buy-backs after exceeding near-term debt reduction targets and its free cash flowreached a record high of $4.2bn in the second quarter. And Occidental has adhered to the industry-wide mantra of keeping production in check.
"Beyond 50pc, a takeover is not out of the question and would certainly be easier," analysts at investment bank Cowen say, even as they caution that Buffett's motivations are not immediately apparent beyond Occidental's free cash flow. In the near term, he may be content to include some of Occidental's earnings in Berkshire's results, under the equity method of accounting. In addition, the warrants he owns are now in the money given the stock's latest gains.
By Stephen Cunningham
Occidental share price
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