At a conference about energy finance and the energy transition on May 19, Occidental Petroleum CEO Vicki Hollub stated it plainly, “We will never walk away from oil and gas…and our carbon management business will continue to grow.”
The company’s strategy clearly appeals to billionaire investor Warren Buffett, who continues to buy so much stock in Occidental that people have begun speculating on whether he would buy the company — a notion that Buffett has denied.
Buffett’s Berkshire Hathaway bought another $211 million worth of Occidental Petroleum common stock shares, according to May 15 Security and Exchange Commission regulatory filings. Last year, Berkshire owned 20% of the company and Buffett won federal authorization in August 2022 to buy up to 50% of Occidental.
Analysts said Occidental’s strong financials, leadership and relationship with Buffett were driving forces in Berkshire Hathaway buying more stocks in the E&P company this week.
On May 16, Fitch Ratings upgraded Occidental’s bond credit rating from BB+ to BBB-, a significant improvement that bumps the company from high yield to investment grade creditworthiness — a key for oil and gas companies’ ability to borrow.
“When we put it all together, the debt reductions, the interest improvement and the improvement in EBITDA from non-E&P segments, they look triple B minus, which is why we upgraded them,” said Mark Sadeghian, senior director at Fitch.
Fitch’s rating action commentary cited Occidental’s improvement in midcycle credit metrics and anticipated improvements in midcycle earnings in the chemical and midstream segments as factors contributing to Occidental’s improved rating. The commentary noted that Occidental had retired more than $26 billion in debt, including $10.5 billion in 2022.
Southern Methodist University finance Professor Don Shelly said Buffett’s common stock purchases this week build on the billionaire’s 2019 commitment of $10 billion to help Occidental buy Anadarko Petroleum, a major E&P company in the Permian Basin.
“Obviously, after making the initial investment to help fund the acquisition, Buffett liked the company and its management so he made a larger bet on the firm, as well as a bet on oil and gas over the medium to longer term. Keep in mind with a cash balance in excess of $100 billion for many years, he has to make large investment bets to move the return dial,” Shelly said of Berkshire Hathaway’s cash on hand.
In 2019, Buffett staked Occidental, helping the E&P snatch Anadarko from rival bidder Chevron Corp. Buffett’s financing gave him warrants to purchase up to 80 million Occidental shares at $62.51 and 100,000 preferred shares with an 8% annual dividend.
TD Cowen’s May 9 earnings update on Occidental found the company in strong shape “benefitting from multi-year de-leveraging efforts and an attractive asset base that should deliver outsized returns of capital to shareholders in the coming years.”
The earnings report led by David Deckelbaum, a managing director at TD Cowen, found that Occidental beat production by 3%, raised guidance by 1% and improved well productivity. Occidental was among the E&P companies repurchasing their shares, buying back $752 million worth of shares in first-quarter 2023.
“[Occidental] has reached a critical juncture where it can return an increasing amount of free cash to shareholders via buybacks and pre-pay expensive preferred notes. This achievement follows years of paying down debt and now that free cash can be deployed towards equity holders,” Deckelbaum said.
Cowen predicted the company will payout in excess 50% of its free cash flow this year.
Todd A. Finkle, author of the recently-published book “Warren Buffett: Investor and Entrepreneur” with Columbia Business School, said much of Buffett’s confidence in Occidental stems from his years-long relationship and trust in Hollub.
“He was talking about how she was involved in the company for a long time, and he has a relationship with her. He just puts so much confidence in people,” Finkle said. “As a matter of fact, I was kind of surprised that he came out and started saying how little he knows about the oil industry.”
Occidental declined an interview request with Hart Energy and said Hollub does not want to comment on her relationship with Buffett. Despite gaining increasing confidence in one of the world’s best known investors—a prize many CEOs long for—Hollub did not mention Buffett’s name once in her panel talk at the May 19 conference sponsored by the University of Houston and the Federal Reserve Bank of Dallas.
Finkle said he believes Buffett’s statement that he does not intend to buy Occidental, but noted that it is his sixth highest investment.
“He kept on buying Occidental all the way until I was finishing my book [about him,] and he’s still buying Occidental,” Finkle said.