Warren Buffett ❤️ Occidental Petroleum, Tug of War at Apple, and Walt Disney
I thought titling this issue "Warren Buffett ❤️ Oxy" might give people the wrong idea
Happy Monday and welcome to our new subscribers!
Accepting that you cannot time the market is a difficult, but important, step in every investor’s journey.
Nope, you’re probably not going to perfectly catch the bottom or sell out at the very top. Sorry to break that to everyone.
But it’s also very freeing to let go of any hopes of timing the market. It eliminates the FOMO or “Gotta do something!” attitude that gets so many investors in trouble.
Much, much easier to stick to a buy-and-hold strategy this way.
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Buffett Adds More Oxy 🛢
Last week, Warren Buffett bought another 12 million shares of Occidental Petroleum, raising Berkshire Hathaway’s stake in the Texas oiler to 18.7% (excluding unexercised warrants).
He’s been steadily buying Oxy for months.
But, as Berkshire’s position ticks up ever closer to 20%, it gets more and more interesting…
The Magic Number. Once Berkshire crosses that 20% threshold — and there’s little reason to expect Buffett to stop buying now — it can adopt the equity method of accounting for its burgeoning Oxy stake.
In layman’s terms, that means a proportional share of Oxy’s profits — in this case, 20% — would be reflected in Berkshire’s own earnings. This year, with the oil giant expected to record $10 billion in profit, that would mean a $2 billion boost for Berkshire.
If that happens, Oxy would join Kraft Heinz and Pilot Travel Centers (among a few others) as Berkshire investments accounted for via the equity method.
Okay, now that your eyes are starting to glaze over from all this accounting talk, let’s get back to the good stuff.
Like recklessly speculating over whether or not Buffett hopes to buy Occidental Petroleum outright.
If that’s where this train is headed, it could turn out to be a slow-motion acquisition right out of the old Buffett Partnership Limited playbook — much like Sanborn Map, Dempster Mill, and Berkshire Hathaway itself. In all three cases, Buffett just kept chipping away with frequent share purchases on the open market, before ultimately shelling out for a controlling interest.
For the time being, though, he seems content to scoop up shares whenever Oxy’s price drops into the mid-$50s — and stop once it shoots up past $60. If nothing else, this puts a pretty solid floor under the stock at about $55.
Confession Time. When the news first broke about Berkshire investing in Occidental Petroleum, I scratched my head.
Buffett’s past experience with oil companies is a little dicey — and, anyway, he typically prefers to back the absolute class of a given industry, rather than one of the smaller competitors.
Exxon Mobil? Sure.
Chevron? Definitely. (Berkshire already owns 8% of the company.)
But, Oxy? Ehh…
A funny thing happened, though, as I started to do some research. The more I dug into Occidental Petroleum, the more it looked like a winner.
All of the major oilers are using this inflationary price boom to get right financially after a brutal few years of deep losses and accumulated debt. Oxy included.
With cash now pouring in, the company reduced its long-term debt by $8.1 billion so far in 2022 — already surpassing last year’s still-impressive reduction of $6.4 billion. If Oxy keeps paying down debt at this pace, it could even afford a dividend hike before the year is out.
Plus, Oxy trades at just 7.5x forward earnings. A valuation made all the more remarkable because its stock is already up 95% year to date.
Carbon Capture. But, just as those negative oil futures in 2020 were never going to last forever, neither will our current sky-high oil prices. Such is life in a cyclical industry.
So I’m fairly intrigued by Oxy’s attempt to add a new wrinkle to its profit profile through carbon capture. The company plans to build a $1 billion direct air capture (DAC) facility that will allow Oxy to create and sell “net zero” oil.
The DAC will remove enough carbon from the atmosphere to at least equal the amount of carbon generated from burning said oil. That means companies worldwide could purchase this “net zero” oil in order to stay in compliance with environmental and regulatory targets.
(And Oxy can make even more money selling carbon credits.)
You don’t need to be a treehugger to recognize how big the market for “net zero” oil could become in the decades ahead.
And, in fact, Oxy’s already making deals. Back in March, South Korea’s SK Trading International agreed to buy 200,000 barrels of “net zero” oil per year (for five years) from Occidental Petroleum.
Small start, but a big future.
I like it when my profit-gushing institutions come with a growth story, too.
🍎 Apple’s Tug of War
In last week’s “Power On” newsletter, Apple whisperer Mark Gurman described a concerning situation brewing in Cupertino. And, for whatever reason, it hasn’t gotten nearly as much buzz as I think it deserves.
Namely, Gurman says that Apple’s in-house development of Mac’s M-series chips seems to be hampering the company’s focus on the iPhone.
Apple’s silicon engineering group had to shift many of its testing, development, and production resources to Mac chips. The question is whether that affected its other products. Combined with supply bottlenecks, the focus may have contributed to slower progress for the iPhone, Apple Watch, and even cellular modems.
This year, for the first time since Apple started designing its own processors, the company won’t be upgrading the chip inside of its main new iPhone. This fall’s entry-level iPhone 14 will retain the A15 chip from last year, with only the Pro version getting a new A16 processor.
I don’t like seeing the iPhone take a back seat to anything, even the insanely impressive new M2 chip.
The iPhone accounts for over 50% of Apple’s revenue, as opposed to Mac and iPad (some Pro models use M chips) which combine for under 20%. In other words, the iPhone is Apple’s golden goose — laying golden eggs, year after year, that keep the company’s coffers full to bursting.
Let’s hope Apple doesn’t forget that.
Mike Walt 🚃
I’m a huge Walt Disney fan.
(Fun fact: This newsletter got its name from the location of the very first Disney studio on Kingswell Avenue in Hollywood.)
One of the secrets to Walt’s success was a fierce conviction in his own abilities and creations. Especially when others doubted him.
Here’s a quick story that ably illustrates the point:
“I met a guy on the train when I was comin’ out [to California]. It was one of those things that kind of made you mad. I was out on the back platform — I was in my pants and coat that didn’t match, but I was riding first class. I was making conversation with a guy who asked me, ‘Goin’ to California?’
‘Yeah, I’m goin’ out there.’
‘What business you in?’
I said, ‘The motion picture business.’
Then, all of a sudden, ‘Oh, is that right? Well, I know somebody in the picture business. What do you do?’
I said, ‘I make animated cartoons.’
It was like saying, ‘I sweep up the latrines.’
Sometimes people make you mad, and you want to prove something to them even though they mean nothing to you. I thought of that guy on the back platform when we had the premiere of Snow White. And the damn thing went out and grossed eight million dollars around the world.”
Back in those days, it wasn’t just an anonymous train passenger doubting (and mocking) Walt Disney. During the production of Snow White and the Seven Dwarfs in the mid-1930s, naysayers out in Hollywood took to calling the project “Disney’s Folly” because of its unprecedented (and risky) nature.
But, as usual, Walt got the last laugh.
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Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.