A Closer Look at Berkshire Hathaway's Bet on "Old" Energy

"How much brains does it take to know that the Permian Basin is America’s best oil reserve? It’s layer after layer after layer. There is nothing comparable [to it]."

Happy Tuesday and welcome to our new subscribers!

Last week, Berkshire Hathaway Energy agreed to purchase Dominion Energy’s 50% interest in the Cove Point LNG terminal and pipeline for $3.3 billion. This boosts BHE’s stake in the Maryland-based facility up to 75% — and gives Berkshire control of a rare domestic asset capable of exporting natural gas overseas.

This comes hot on the heels of Berkshire increasing its ownership of Occidental Petroleum to over 25%. (And, lest we forget, Berkshire also holds 132.4 million shares of Chevron. Unless, of course, that changed during Q2 2023.)

Any way you slice it, Warren Buffett and co. seem to be doubling down on their commitment to the energy industry. In particular, a commitment to legacy energy sources — like oil and natural gas — that are decidedly out of favor in certain circles.

Why is that?

Well, other than being delightfully contrarian, the future of O&G production is not quite the dead end that some would have you believe.

I’ve gathered together some recent news and updates about Berkshire’s “old” energy investments (like Oxy and Chevron) that will hopefully connect the dots and fill in the picture a little more clearly.

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Occidental Petroleum

Oxy CEO Vicki Hollub recently hopped on Barron’s Streetwise podcast and, in a few short minutes, summed up her company’s “best of both worlds” approach. In short, OXY 0.00%↑ is a cash cow with a growth story.

While its detractors blame Oxy (and other oil companies) for a long list of environmental sins, Hollub remains focused on incorporating Direct Air Capture (DAC) technology in a way that will maximize energy production, while also making the entire process a little cleaner.

And, importantly, she insists that this isn’t some pie-in-the-sky dream. But, rather, a technique that syncs up well with the company’s existing core competencies.

We’re going to use radial fans that already exist today — they’re used in other types of industrial situations — so we’ll pull air through a contact tower and the contact fluid that’s going to take the [carbon dioxide] out of the air is potassium hydroxide. Our chemicals business is the largest marketer of that in the United States and the second-largest in the world. So we have a lot of skill and ability and knowledge around how to use potassium hydroxide. That’s a key component.

In the contact tower, to make it mix better and to create better efficiency, you need to put diffusers in the air so that the mixing happens. The diffusers in the contact tower will be PPC-based, which is another product that we make.

We’re building the first [DAC facility] in the Permian Basin where we already have the infrastructure to support it. So there are a lot of reasons why this strategy fits for us — because what we didn’t want to do … was try to be something that we’re not.

What I find most exciting, though, is what Oxy has planned for the carbon dioxide after it has been sucked out of the atmosphere. (Spoiler: increased oil production.)

We strongly believe our industry should adapt the same strategy that we have — and that is to take [carbon dioxide], put it in the oil reservoirs which creates more oil production but the incremental oil that it produces will emit less than the [carbon dioxide] volume that we had to inject to get it.

So that means the [carbon dioxide] going in is higher than what the extra oil coming out will emit when used.

Remember that Wall Street Journal article from March that warned about the declining fortunes of the Permian Basin? Hollub credits Oxy’s proprietary subsurface techniques (which result in better fracking results) as the reason her company has sidestepped this production downturn.

If you go back and you listen to earnings calls from other CEOs, many of them are talking about their wells [not being] as productive last year as they were the year before. But for seven years in a row, we’ve grown our productivity in the Delaware Basin while others could not … Even in comparable settings where others have the same assets as we do, our team has been able to go above and beyond.

When you combine Occidental Petroleum’s engineering prowess, incredible asset base in the Permian, and the introduction of DAC in the near future, it’s easy to see why Warren Buffett is so eager to make the company one of the cornerstones of his investment portfolio.

Trying to predict the exact future of the energy business is a fool’s errand, but Oxy appears as well positioned as any to deal with what might lie ahead.

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Speaking of Vicki Hollub and Occidental Petroleum, I recently stumbled upon a Charlie Munger interview from 2020 in which he explains why Berkshire Hathaway agreed to help Oxy finance its high-priced acquisition of Anadarko.

It’s perfectly obvious that the Permian Basin is our #1 oil reservoir and we don’t have another one like it … so, of course, we did it. It’s not very difficult [to make that decision very quickly]. But, you’re right, there are all kinds of organizations with their endless due diligence. We knew enough to act — and, by the way, they were in a hurry.

You don’t need perfect. If you’re 96% sure, that’s all you’re entitled to in many cases. I see these people doing this due diligence and the weaker they are as thinkers, the more due diligence they do.

How much brains does it take to know that the Permian Basin is America’s best oil reserve? It’s layer after layer after layer. There is nothing comparable … [Vicki Hollub] is a production engineer — she’s good — and they get better results from that shale than other people.

It’s a no-brainer. At least, it’s a no-brainer if you don’t make it hard.

This Munger interview is so good — and so wide-ranging — that I’m calling an audible and making a transcript of it for paid supporters next week. (The first two or three questions, which amounts to thousands of words, will be available for free subscribers, too.)

The Todd Combs NFM transcript will now become August’s “perk” for paid subs.

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Chevron

Berkshire Hathaway’s other big energy investment, Chevron, is also making moves.

Back in May, CVX 0.00%↑ announced that it would acquire PDC Energy in an all-stock transaction valued at $6.3 billion. Including assumed debt, the price tag rises to $7.6 billion. Interestingly, this is not a Permian play by Chevron. But, rather, all about PDC’s 275,000 acres in the Denver-Julesburg (DJ) Basin in the Rocky Mountains.

(Chevron does get 25,000 acres of Permian land in the deal, but that’s considered a minor part of the overall value.)

“PDC’s attractive and complementary assets strengthen Chevron’s position in key U.S. production basins,” says Chevron chairman and CEO Mike Wirth. “This transaction is accretive to all important financial measures and enhances Chevron’s objective to safely deliver higher returns and lower carbon.”

In particular, Wirth expects free cash flow to increase by $1 billion annually after PDC joins the fold.

But here’s the rub: It comes at the cost of shareholder dilution. Chevron will issue 41 million shares of common stock to complete the transaction, which will drop Berkshire Hathaway’s ownership percentage by a tenth of a percentage point or two.

I’m reminded of what Charlie Munger once said about Gillette’s acquisition of Duracell in 1996. “When you’ve got a wonderful business and you issue shares in it to buy another business, I’d say at least two times out of three, it’s a terrible idea.”

Which basket will the Chevron-PDC deal end up in?

Time will tell.

For now, though, it’s interesting to see a domestic oil major embrace life outside the Permian. “This seems like a testament to the idea that the DJ [Basin] can be a core U.S. position even for a company as large as Chevron,” reports the Colorado Sun.

When Berkshire’s 13F comes out next month, I can’t wait to see if Buffett chopped and changed his Chevron position for the twelfth(?!?!) quarter in a row.

And, if he did, we can begin wildly speculating about whether or not the PDC acquisition played a role in his decision. Roll on August 14.