The fact that Buffett is expanding Berkshire’s position when he sees little else worth buying speaks volumes.
Just when it looks like Warren Buffett is done adding a position in a particular company, you learn he isn’t. Last week, Berkshire Hathaway (BRK.A -0.07%) (BRK.B 0.25%) expanded an already-massive Occidental Petroleum (OXY 1.51%) holding that hadn’t been touched in months, capitalizing on the stock’s 35% pullback from April’s peak that more or less aligns with crude oil’s price action for the same time frame.
Should you take the Oracle of Omaha’s lead and scoop up some of these discounted shares of the energy company for yourself? Keep reading.
Why Buffett keeps buying Occidental Petroleum
With last week’s acquisition of another 8.9 million shares, Berkshire now owns over 260 million shares of Occidental Petroleum. They’re collectively worth over $12 billion, making it the conglomerate’s sixth-biggest stock holding.
But is it a smart pick for your portfolio?
Buffett himself can help partially answer the question. As he explained in his 2023 letter to Berkshire Hathaway shareholders posted early this year, “Under Vicki Hollub’s leadership, Occidental is doing the right things for both its country and its owners … Vicki does know how to separate oil from rock [fracking], and that’s an uncommon talent, valuable to her shareholders and to her country.”
And he’s right, although he arguably undersells her value to shareholders while she’s at the helm.
Although shale reasonably proved over a decade ago that it can be viable, many oil and gas company executives — including Hollub — now concede that fracking isn’t a guaranteed moneymaker. Hollub’s four decades’ worth of industry experience and understanding of what works (and what doesn’t) in the business, however, has made Occidental Petroleum something of a standout — in a good way.
Chief among the competitive advantages Hollub has made a point of maximizing is where the company develops its projects. It’s no coincidence that the bulk of Occidental’s projects are in and around the Permian Basin, where it also has access to infrastructure.
In the meantime Occidental is working to shed properties like Barilla Draw and its stake in Western Midstream, which don’t quite align with its core business any longer.
The bigger picture provides a bullish case for Occidental
But aren’t oil and gas on the way out, to be replaced by battery-powered vehicles, solar panels, and other “green” initiatives? Why is Buffett interested in anything from a sector that’s apparently past its prime?
Because oil and gas are far from being on their deathbeds.
Reality: The world’s nowhere near ready to fully transition from fossil fuels to renewables. As of its latest look, the U.S. Energy Information Administration reports that 60% of the country’s electricity still comes from fossil fuels, with more than 40% of it coming from natural gas (which is generally found and extracted alongside crude oil). Renewable energy sources like solar will account for most of the country’s power-generating capacity additions through 2050. But at just over 20% of the United States’ current electricity creation, it will take years — if not decades — to displace the need for oil and gas to the point the business is no longer viable.
The same basic dynamic applies outside of the U.S. as well, by the way.
Then there’s automobiles. Although no one can deny electric vehicles are now well into the mainstream, last year only 1-in-5 sold worldwide was an EV. Demand growth for electric vehicles then slowed down this year, as more and more consumers realized charging infrastructure isn’t readily available everywhere they need to travel. Again, it could take years if not decades for electric vehicles to become more practical than gas-powered automobiles for most consumers.
To this end, Goldman Sachs believes worldwide oil demand is likely to continue growing before peaking at 110 million barrels per day in 2035. And even then it’s likely to hover near that level for at least five more years beyond that. OPEC, meanwhile, doesn’t see so-called “peak oil” happening until 2050, at a little over 120 million barrels per day versus roughly 104 million barrels per day now.
Connect the dots. There’s plenty of money to be made by Occidental at least until then.
And if you think carbon-reduction mandates are set to accelerate the end of oil, know that initial plans are starting to look far too aggressive. Companies ranging from airlines to schools to tech giant Alphabet to energy company BP as well as states including New York and California are all coming up short of their initial net-zero milestone goals.
But even so, Occidental stands ready to not only survive the advent of the carbon-free era, but it will usher it in whenever it happens. Although its tech is still closer to being developmental than commercial, fewer companies stand as ready as this one does to capitalize on the annualized growth pace of 22% that Precedence Research expects from the carbon-capture industry between now and 2033.
Take the hint at face value
A bulletproof pick? No, there’s no such thing. Every investment prospect brings trade-offs to the table. This one’s no exception. In this case, the chief downside is relatively slow and uneven growth compared to other options — a drawback that’s deflated investor interest for the better part of this year.
It’s still a reasonable trade-off, though, particularly in light of Occidental stock’s sizable pullback since April.
It’s also worth mentioning analysts aren’t dissuaded by this weakness. Shares are now priced 30% below their consensus price target of $61.48.
Perhaps more than anything, the Oracle of Omaha likes the idea of buying more shares of a stock he already owns plenty of despite being in a market environment, he laments, that offers very few attractive investment options. If you’re looking for an undervalued dividend payer, that hint alone is compelling enough.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. James Brumley has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Berkshire Hathaway, and Goldman Sachs Group. The Motley Fool recommends BP and Occidental Petroleum. The Motley Fool has a disclosure policy.