There are a number of energy giants that Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) CEO Warren Buffett could have chosen to focus on. He might have invested heavily in Exxon Mobil (NYSE:XOM) or Chevron (NYSE:CVX), for example. Yet, the Oracle of Omaha has picked Occidental Petroleum (NYSE:OXY) again and again.
It’s actually surprising that he’s investing in any company at all now. Due to the high interest rates and a paucity of worthy deals to make, Berkshire’s hoard of cash and/or Treasury bonds just reached a record $157.2 billion.
Yet, even if worthy investments are few and far between, evidently Buffett is willing to make an exception with Occidental Petroleum. Berkshire reportedly purchased around $246 million worth of OXY stock in October; with that, the conglomerate’s stake in Occidental grew to an eyebrow-raising 25.8%. Let’s see if we can figure out why Buffett is so eager to jump into the oil patch with a supersized investment in Occidental Petroleum.
A decent value-and-yield combo
Unfortunately, Buffett doesn’t typically provide in-depth explanations of why he buys any particular stock. News sources typically learn about Berkshire Hathaway’s share purchases and sales through regulatory filings that disclose what was bought and sold and when, but not why.
Nevertheless, there must be something special about Occidental Petroleum, as opposed to Exxon Mobil or Chevron or some other energy giant, that appeals to Buffett. Maybe it’s Occidental’s dividend distributions, as Buffett certainly doesn’t mind collecting those quarterly payouts.
However, Occidental Petroleum’s forward annual dividend yield is a mere 1.06%, which lags the energy-sector average dividend yield of 3.752%. Thus, Occidental isn’t the sector’s most generous dividend payer by a long shot.
Perhaps Occidental Petroleum offers a value that Buffett just can’t refuse. Currently, Occidental’s trailing 12-month price-to-earnings (P/E) ratio is 10.14. That’s slightly below the sector median P/E ratio of 9.41, but it’s still pretty low, and it suggests that OXY stock isn’t overvalued.
So far, it appears that Occidental Petroleum provides a decent combination of value and dividend payments, but nothing spectacular. It’s probably enough for Buffett to check those boxes, but we still need to find other reasons why Buffett might heavily favor Occidental Petroleum.
Could carbon-capture endeavors capture Buffett’s imagination?
Buffett certainly wants to invest in an energy company that’s forward-looking. This could mean maintaining a stake in fossil-fuel assets while also promoting clean-energy initiatives such as carbon capture.
To that end, Occidental Petroleum is partnering with financial giant BlackRock (NYSE:BLK) to develop STRATOS. Located in Texas, STRATOS is billed as the world’s largest direct air capture (DAC) facility. As the press release explains, DAC “captures and removes large volumes of” carbon dioxide “directly from the atmosphere, which can be safely and securely stored deep underground in geologic formations.”
BlackRock is committing $550 million to STRATOS, which is designed to capture up to 500,000 tons of carbon dioxide per year. Clearly, this partnership underscores Occidental Petroleum’s commitment to net-zero objectives. It’s possible that Berkshire Hathaway’s continuous investments in OXY stock is an expression of Buffett’s views on the future of the energy industry.
An earnings winner and ambitious producer
No doubt, Buffett appreciates a good value and likes to collect passive income. That’s not the full story, however. The Berkshire CEO also wants to invest in businesses that can execute and deliver results that meet or exceed expectations.
In light of Occidental Petroleum’s third-quarter results, it appears that the company can deliver what the market is looking for. Impressively, Occidental posted a profit of $1.18 per share in Q3, easily beating the analysts’ consensus estimate of 84 cents per share.
Additionally, Occidental Petroleum generated third-quarter revenue of $7.4 billion. Wall Street had expected $7.19 billion, so that’s another quarterly beat for the company.
Not only that, but Occidental Petroleum produced more oil than anticipated. Specifically, the company produced 1.22 million barrels of oil and gas per day (mboed). Three months earlier, the midpoint of Occidental’s guidance called for 1.19 mboed.
In other words, the company remains an ambitious oil producer even while pursuing carbon-capture technology. This, more than anything else, may be what attracts Buffett to OXY stock again and again.
Beyond checking the right boxes, Occidental is the type of business that a legendary investor can stand by year after year: well-rounded, consistently profitable, and mindful of the present and future at the same time.
