Warren Buffett has kept plenty of cash in recent years.
By the end of 2021, cash at its holding company Berkshire Hathaway had hit a near-record high of $146.7 billion. This shouldn’t be a surprise. Buffett is a value investor, after all, and valuations have been inflated in the US stock market after major rallies in 2020 and 2021.
“We find few things that excite us,” Buffett said in a recent letter to Berkshire shareholders. But in 2022, Berkshire stocked up on shares of integrated oil and gas giant Occidental Petroleum (OXY).
Over the past week, Berkshire has spent more than $500 million to acquire an additional 9.6 million shares of the company. This brings Berkshire’s total stake in OXY to 152.7 million shares, worth about $8.5 billion.
Let’s take a closer look at the move and consider whether investors should follow suit.
Big bet on big oil
Berkshire backed up the truck to OXY after the company’s earnings conference call in late February. Buffett read the transcript and liked what he saw.
“I read every word and said that’s exactly what I would do. She’s running the business the right way,” the billionaire investor told TSWT, referring to Occidental’s CEO, Vicki Hollub “We started buying on Monday and we bought everything we could.”
In the fourth quarter of 2021, Occidental generated $8.01 billion in revenue, representing a 139% year-over-year increase. Adjusted earnings per share were $1.48, a marked improvement from the adjusted loss of 65 cents per share a year earlier.
During the conference call, Hollub highlighted Occidental’s strong operating results, improving balance sheet and a new shareholder return framework.
On February 24, the company’s board of directors declared a regular quarterly dividend of 13 cents per share on OXY common stock, a whopping 1,200% increase over the previous quarter’s payout of just 1 cent per share. stock. The company also announced a $3 billion share buyback program.
Three months later, we learned that things continued to improve in 2022. In the first quarter, OXY generated $8.53 billion in revenue and adjusted earnings of $2.12 per share.
While Berkshire’s recent big oil bet grabs headlines, it’s not the first time Buffett has invested in Occidental.
In 2019, Berkshire spent $10 billion in Occidental preferred stock to help the company buy fellow Houston-based energy producer Anadarko Petroleum. Occidental pays a dividend of 8% per year on these preferred shares, providing Berkshire with $200 million each quarter in dividend income.
The arrangement also gives Berkshire warrants to purchase 83.9 million shares of Occidental common stock at an exercise price of $59.62.
Hot stock in a hot space
Strong commodity prices have greatly benefited oil producers in 2021. Of the 11 S&P 500 sectors, energy was by far the best performer in 2021, with an impressive return of 53%, well outpacing the gain 27% of the S&P 500 for the year.
This performance gap only widened in 2022. The energy sector is already up more than 20% since the start of the year, compared to a 20% decline in the S&P over the same period.
It’s not hard to see why: Oil prices were already on a sharp upward trend before Russia’s invasion of Ukraine further fueled the recovery.
A rising tide lifts all boats, but Occidental has soared higher than most of its peers, returning a whopping 80% already in 2022.
Will the rally continue?
Although investors have driven the stock up with enthusiasm, more gains could be on the horizon.
In April, Raymond James raised his price target on OXY from $85 to $90 while maintaining a strong buy rating. The shares are now trading at around $56 apiece.
Last month, Mizuho reiterated a buy rating on OXY while raising its price target from $85 to $89, about 59% above the stock’s current position.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.