Warren Buffett currently has more cash on hand than he has good ideas to invest in. Berkshire Hathaway‘S (NYSE: BRK.A) (NYSE: BRK.B) Cash and Treasury holdings could top $300 billion by the end of the third quarter, thanks to Buffett’s recent decisions to sell shares in Berkshire’s equity portfolio without reinvesting the funds in new holdings. Buffett has sold more shares than he bought in each of the last seven quarters.
That trend is extremely clear today. Buffett has over $7 billion in Bank of America shares since the start of the third quarter. Meanwhile, one of the few stocks he has consistently bought over the past two years is at a two-year low, but he has not bought any additional shares.
In 2019, Berkshire Hathaway paid $10 billion for preferred stock in Occidental Petroleum (NYSE: OXY)including warrants to buy shares at around $60 each. For the past two years, Buffett has consistently bought shares when they trade below that $60 price, while letting Occidental sell off its preferred stock. But now that Occidental shares are worth nearly $50, Buffett has not added to his position any further.
Buffett said in his 2023 letter to shareholders that he plans to hold Occidental shares indefinitely. But he no longer appears interested in acquiring more.
Image source: The Motley Fool.
Why isn’t Buffett buying?
Occidental is much more sensitive to oil prices than other integrated operators. It is heavily focused on extracting oil from rock compared to other oil and gas companies, which means that when oil prices fall, Occidental’s profits fall as well.
Since the start of the third quarter, the price of West Texas Intermediate crude has fallen about 15%. The price dipped below $70 a barrel earlier this month before recovering slightly. That’s a key price for Occidental, which said its acquisition of CrownRock last year would add $1 billion to its free cash flow based on a price of $70 a barrel for WTI.
That CrownRock deal also left Occidental with a high level of debt on its balance sheet. Management has been strategically shedding assets to accelerate debt repayment. CEO Vicki Hollub expects to reduce balance sheet debt from about $19.7 billion to $15 billion by the end of 2026 or the first quarter of 2027. The company paid down $3 billion of debt in the third quarter, putting it well on track to meet that goal.
But it will be slower from here, which will require excess cash flow to achieve that debt reduction. And with oil prices falling, that cash flow will not be nearly as high as it was when oil prices were in the $80 range.
Hollub’s aggressive moves in the industry show confidence in oil prices rebounding. And Buffett’s past purchases and praise for Hollub suggest he’s bullish on oil prices long term, too. But it’s a double-edged sword, and right now it’s hurting Occidental.
Should investors stay away or seize this opportunity?
Occidental is one of Buffett’s largest holdings. As noted, he has consistently added to his position in the company over the past two years whenever the stock has been priced below $60. As a result, Berkshire Hathaway now owns about 28% of the common stock of the company.
Buffett said he has no plans to take a controlling interest in the company, and he may be satisfied with the current level of investment in the company. With the pressure on Occidental’s cash flow, it’s unlikely he’ll be shedding that much of his preferred stock for a while, and he’ll receive an 8% dividend on the remaining $8.5 billion investment.
The vast majority of Buffett’s holdings were acquired at prices between $55 and $60 per share. Now that the stock is trading closer to $52, investors are getting about a 10% discount off Buffett’s average price.
Despite the financial challenges for the company outlined above, there are reasons to be optimistic about Occidental. First, its portfolio of assets, particularly in the Permian Basin, gives it an enviable position for its upstream segment. It has cheap access to oil as a result, and when oil prices rise, that position pays off in strong profits for the company.
Additionally, Occidental is investing heavily in carbon capture technology. It recently received a $650 million award from the U.S. Department of Energy to build a Direct Air Capture (DAC) Hub in South Texas. Occidental plans to commercialize projects like its DAC Hub by selling carbon credits for companies to offset their emissions, with some sales already in the pipeline. In the coming decades, carbon capture could grow into a multi-trillion-dollar industry. Buffett is also bullish on Occidental’s carbon capture efforts.
At its current price, Occidental shares are trading for an enterprise value-to-EBITDA ratio of about 5.4. That’s a discount to its larger peers. And given the current price of oil and the company’s financial position, it should perhaps be trading at a discount. But investors bullish on the price of oil and the long-term prospects of carbon capture may want to take a closer look at Occidental shares at their current price.
Should You Invest $1,000 in Occidental Petroleum Now?
Before buying Occidental Petroleum stock, you should consider the following:
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.