Permian Powerhouse: Berkshire Hathaway Adds More Oxy

“There’s no oil basin in the United States that compares to the Permian [Basin] in terms of promise."

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Earlier this month, Warren Buffett raised eyebrows with an unexpected — and unprompted — admission at Berkshire Hathaway’s annual shareholder meeting.

“There’s speculation about us buying control [of Occidental Petroleum],” he said. “We’re not going to buy control … We wouldn’t know what to do with it.”

And, just like that, Buffett stopped the Oxy takeover talk dead in its tracks.

“We will not be making any offer for control of Occidental,” he continued, “but we love the shares we have. And we may or may not own more in the future.”

As it turns out, Berkshire would own more shares within the week. In fact, Buffett bought more OXY 0.00%↑ on six consecutive business days (May 11-18) — shelling out $327.1 million for 5.6 million shares of the oil-and-gas giant. That boosted Berkshire’s stake in the company up to 24.3%.

(And that’s not even including those warrants from the Anadarko deal. If Buffett eventually exercises his right to buy 83.8 million more shares at a price of $59.62 each, Berkshire will then own over 30% of Oxy.)

We should find out later tonight if this latest shopping spree is over or not. If Buffett bought more Oxy over the last three days, a new Form 4 must be filed with the SEC (and released to the public) after the bell.

Either way, Occidental Petroleum is fast becoming one of the linchpins of Berkshire’s portfolio. And, as such, it’s a company that all Berkshire followers (myself included) should become better acquainted with.

So I spent the weekend digging up more information on Oxy, its history with Berkshire Hathaway, what Warren Buffett sees in it today — and where this investment might go tomorrow…

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Warren Buffett is the first to admit that his past dalliances with oil companies — from Exxon Mobil to ConocoPhillips — have not exactly set the world on fire. “We have not distinguished ourselves, at all, in the oil and gas field,” he said in 2015, “although we’ve made a little money.”

“We will not be buying, very often, oil and gas stocks,” he continued. “But we probably haven’t bought the last one.”

So what was it about Occidental Petroleum that convinced Buffett to get back up on the O&G horse?

• Like most of the major oilers, Oxy used the recent inflationary price boom to repair a balance sheet battered by a brutal few years of deep losses and accumulated debt. In 2022, with cash pouring in all year long, the company reduced its long-term debt by $10.5 billion (37% of the outstanding principal), raised its dividend by 38%, and repurchased 47.7 million of its own shares.

• But Buffett’s interest in Oxy actually dates back to 2019, when he helped finance the company’s pricy acquisition of Anadarko. Back then, Bank of America’s Brian Moynihan connected Buffett with Oxy CEO Vicki Hollub to help her outgun Chevron in the race for Anadarko. As Hollub remembers it, she arrived in Omaha ready to lay out her case for the deal and how it would benefit Oxy in the long-term. “But I found out he already knew everything [about Occidental],” she said. “I guess he’s an avid reader, must be a speed reader, and must also have a photographic memory.” Berkshire agreed to purchase $10 billion worth of preferred shares — with an 8% yield attached and warrants for 83.8 million shares of common stock. Right out of the Buffett playbook.

• Seemingly, it all comes down to the Permian Basin — and Oxy’s especially strong position there. “We don’t know what oil prices will be,” Buffett said at the annual meeting, “but we do very much like the Occidental position they have [in the Permian]. That’s why we financed them a few years ago.”

  • Charlie Munger agreed: “There’s no oil basin in the United States that compares to the Permian in terms of promise.”

What makes the Permian Basin such lucrative territory — and how did Oxy end up with so much of it?

• In 2017, Forbes described the Permian as “a petroleum layer cake” with enormous deposits of oil-soaked rock and shale just waiting to be captured. Plus, drilling wells on this west Texas and southeastern New Mexico land offers cost savings and efficiencies that cannot be found elsewhere. It has quickly become the top oil-producing area in the United States.

  • But, as Buffett pointed out at the annual meeting, it’s not all roses. Wells in the Permian tend to die out faster than old-school oil fields. Life is full of such trade-offs.

• Oxy emerged as one of the powerhouses of the Permian after acquiring Altura Energy (and its vast holdings in the basin) for $3.6 billion in 2000. It got the land for a song — mostly because no one knew how to get at and release the oil and natural gas from these stacked shale formations. Now, after huge advances in fracking technology, it’s open season for drillers. “We know the Permian,” Hollub said. “It’s the foundation of our company.”

  • Hollub on Q1 2023 results: “In the Permian, our Delaware subsurface teams continue to optimize and unlock inventory as demonstrated by the success of a deeper Wolfcamp horizon with a single well generating a 30-day initial production rate of 6,500 barrels per day and an Oxy record for this interval.”

• Despite the clickbait-ish title (Is Warren Buffett’s Favorite Energy Stock Overhyped?), OilPrice.com is a big fan of Oxy’s recent moves: “Occidental Petroleum is a very profitable company. OXY 0.00%↑ has developed highly-efficient drilling technologies and owns some of the most productive fields in the Permian Basin. In its latest earnings call, CEO Vicki Hollub revealed that the company has increased well productivity for seven straight years, with 2022 wells returning 205% more barrels of oil equivalent per day than they did seven years back. Oxy is able to squeeze more from its existing wells without having to spend too much, hence its high margins.”

Even better, this profit-gushing cash cow comes with a growth story, too.

• Last month, Occidental broke ground on a $1.1 billion direct air capture (DAC) facility — named Stratos — that promises to remove 500,000 tons of carbon dioxide from the atmosphere each year. It is scheduled to open in 2025.

• This not only blunts some of the ESG criticism that gets leveled against every fossil fuel company, but also sets the stage for an exciting — and profitable — future. Eventually, Oxy hopes to sell “net zero” oil (and carbon credits), which could be a hot commodity with other companies aiming to remain in compliance with regulatory targets. You don’t need to hug any trees to see how big the market for “net zero” oil could become in the years ahead.

  • Hollub: “We will never walk away from oil and gas … [but] our carbon management business will continue to grow.”

  • And, in the meantime, Berkshire won’t be hassling Oxy about its O&G roots. “We do not think it’s un-American to be producing oil,” Buffett said.

• Hollub is pragmatic, too. DAC can help Oxy wring every last drop of oil out of its existing reserves. “To drive down costs, Occidental wants to use the carbon dioxide it captures in its enhanced oil recovery business,” Bloomberg reported in 2021, “where the gas is pumped into older wells to infiltrate rock and acts like soap to release crude. Being able to build an air capture plant close to its extensive Permian operations would eliminate the costly need of transporting carbon dioxide to its enhanced recovery wells.”

  • DAC is not only an intriguing move for the future, but also a boost to Oxy’s current business. That’s the kind of synergy I can get behind.

• Oxy plans to build up to 100 more DAC facilities by 2035 — with each one slated to remove approximately one million tons of carbon dioxide each year.

So where does Berkshire Hathaway’s interest in Occidental Petroleum go from here?

• Well, first of all, I have no idea. Last summer, Berkshire received permission from the U.S. Federal Energy Regulatory Commission to buy up to 50% of Oxy. It remains an open question whether or not Buffett intends to take his stake in the oiler that high. Especially since he just denied any interest in an outright takeover.

  • For the time being, though, my guess is that Berkshire will keep buying whenever the price of OXY 0.00%↑ falls into the value zone.

• Interestingly, Buffett’s latest splurge hasn’t moved the market much. Outside of a blink-and-you’d-miss-it blip on Friday morning, Oxy has remained stubbornly stuck under $60 for most of May. (That seems to be Buffett’s magic number.) If nothing else, his consistent buying pattern puts a pretty solid floor under the stock in the mid- to high-$50s.

I’ll leave everyone with something to chew on. The entire investing world knows that Warren Buffett loves Occidental Petroleum under $60 — yet it keeps presenting him with opportunity after opportunity to buy more at that price.

Whatever happened to The Buffett Bounce?

Will Berkshire press the pause button at 50% even if Oxy stays under $60?

Or, despite Buffett’s denial at the annual meeting, could this deal eventually become too tempting to pass up?