According to the latest 13F FilingsWarren Buffett’s holding Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) increased its stake in just two companies. One of these companies is an insurance operator Chubb Ltda. The other is an energy giant that, frankly, Buffett is obsessed with. He’s a big fan of how the company is being run. After reviewing the company’s annual report, Buffett told CNBC, “I read every word and…this is exactly what I would be doing.”
Buffett clearly loves this company
Buffett has long been a firm believer in good management teams. But they need to be accompanied by good deals. “When a management with a reputation for brilliance approaches a business with a reputation for bad economics,” he once observed, “it is the reputation of the business that remains intact.”
When it comes to good management teams, Buffett was impressed by the oil and gas producer Western Oil (NYSE: OXY). When asked about the company’s CEO, Vicki Hollub, Buffett highlighted that she is “running the company the right way.”
But what about the underlying business economics? In last year’s letter to investors, Buffett detailed exactly what he loved about Occidental’s business model. “We particularly like its vast oil and gas holdings in the United States, as well as its leadership in carbon capture initiatives,” he wrote. Hollub positioned the company for success through a series of wise acquisitions and relentless capital management. This turned the company into a free cash flow machine. The stock currently trades at a free cash flow yield of 8.5%.
In early 2019, it was first revealed that Berkshire had taken a position in the company through a financing deal that granted Berkshire warrants and preferred shares. Then, in 2021, Berkshire purchased Occidental common stock. At the time, holdings totaled about 91 million shares worth about $5 billion. Berkshire also still held warrants to purchase an additional 83.9 million shares. These warrants were obtained in the previous deal, in which Berkshire helped Occidental finance the acquisition of Anadarko, another oil and gas producer.
Since that initial position, Berkshire has continued to acquire more shares. Today, its holdings have nearly tripled, to about 250 million shares worth about $15 billion. More than four million of these shares were acquired in the last quarter alone. Berkshire still holds most of its warrants, which are now in the money.
Buffett’s massive bet on Occidental shouldn’t surprise anyone paying attention. In 2022, Berkshire received regulatory approval to eventually acquire a 50% or greater stake in the company. And in his 2023 letter to investors, Buffett added a surprising note to his comments on Occidental, writing that he believes Berkshire’s stake in the company will likely be maintained “indefinitely.” He placed the Occidental in the same category as American Express It is Coke – two companies that have remained in Berkshire’s portfolio for decades.
Should you buy Western stock?
Buffett is undeniably taking a long-term view with Occidental stock. But there’s also no denying that he’s already made a considerable profit from his common stock investment. Since Buffett began buying, the stock has more than doubled in value, while Berkshire’s warrants and preferred shares have also increased in value.
The easier profits may have already been made, but that doesn’t rule out Occidental for many investors. The company’s cash flow gives it operational flexibility to strategically acquire competitors, repurchase shares, support a 1.5% dividend, avoid taking on debt at historically high interest rates and invest in long-term initiatives like carbon capture. This means that its future will ultimately depend on two things: Management and oil prices.
From an operational standpoint, Occidental has a relatively impressive management team. It has managed to increase production, continually reduce drilling costs, and attract long-term financiers like Buffett and Berkshire. There is no denying, however, that as an oil and gas producer, Occidental’s share price will be heavily affected by the direction of oil and gas prices. Many analysts believe that oil prices will grow over time, and Buffett seems equally optimistic. But potential investors need to have the same conviction, no matter how much they admire Occidental’s management team or strategy.
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American Express is an advertising partner of The Ascent, a Motley Fool company. Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The motley fool has a disclosure policy.
Warren Buffett is buying shares in this company. Should you do the same? was originally published by The Motley Fool
