Warren Buffett has been buying bunches of
stock. Will he buy the whole thing?
That is the question that some investors are asking after the aggressive purchases by
(Ticker: BRK/B) during the past two weeks of Occidental Petroleum (OXY) stock.
It’s very unusual for Buffett, who oversees Berkshire’s $350 billion equity portfolio, to buy shares in a company so actively and openly. Berkshire’s buying has helped drive up Occidental’s stock price by over 30% in March to $57.95 on Friday, outpacing the rest of the broader energy sector. Berkshire shares hit a record Friday and the Class B stock ended at $326.60, up 0.4% in the session.
Berkshire has been stymied in the search for what Buffett has called an “elephant”-sized acquisition —or any sizable deal, for that matter—since it paid over $30 billion for Precision Castparts in 2016. That deal has been a disaster for Berkshire due to the fallout in the commercial aerospace industry due to the pandemic. But more than anything, Buffett is price-conscious, which may be the main reason he hasn’t done a deal.
Nor does his Occidental purchases seem to be about getting more exposure to the energy sector. If that was the case, Buffett could have bought more shares of
(CVX), which Berkshire already owns, and not have impacted Chevron’s stock price too much. He wouldn’t have had to report the purchases publicly within two business days, either, as he must do now with Occidental as a 10% holder.
Why would Occidental potentially appeal to Buffett?
He knows the company well after having invested $10 billion in Occidental preferred stock, which pays a lush 8% dividend yield, in 2019 when Occidental CEO Vicki Holub was seeking quick financing in a bidding war with Chevron for Anadarko Petroleum, which Occidental won thanks in part to the Berkshire investment. Berkshire also got 83.9 million Occidental warrants for free as part of that deal, which are struck at $59.62 a share.
Occidental is also the right size. The company is now valued at $54 billion which makes it very digestible for Berkshire, given its nearly $150 billion in cash.
Occidental’s valuation is still reasonable assuming oil prices don’t collapse from the current $110 per barrel. The stock trades for less than 12 times projected 2022 earnings of about $5 a share and that estimate could prove low given the recent surge in energy prices. In a recent note, Morgan Stanley analyst Devin McDermott wrote last week that the entire oil and gas sector looked appealing and that Occidental was discounting an…
Read More: Warren Buffett Bought 12.7% of Occidental Petroleum Stock. Will He Buy the Rest?