Is Buffett’s Latest Masterstroke A Forever Hold?

While Warren Buffett is largely known as a buy-and-hold investor, his definition of “hold” changes depending on his conviction.

He has not been shy in the past about sharing mistakes, meaning purchases that subsequently were losers. IBM, for instance, was a classic example of Buffett buying a stock and then doing a U-turn on it and exiting.

Other stocks, however, seem to pass the test of a “forever hold”, including Coca Cola and American Express, both of which Berkshire has owned for decades.

When Buffett decides a company is worth betting the farm on, he isn’t shy either. Apple falls into that latter camp, and now represents a full 50% of Berkshire’s equity portfolio.

Warren has been quick to note that Apple does not represent 50% of Berkshire’s overall holdings. His railroad, GEICO, See’s Candies and many other firms all fall outside the equity portfolio umbrella. Still, Apple represents a disproportionately large stake relative to his other equity holdings.

The reality is very few stocks make the cut in Berkshire Hathaway’s portfolio but even fewer make the grade as “forever holds” and yet a relatively new company, Occidental Petroleum, appears to be earning that badge of honor.

Why is the Oracle of Omaha so keen on this oil and gas play?

Who Invested In OXY?

Berkshire Hathaway, Dodge & Cox, Vanguard Fiduciary Trust and State Street Corporation have all invested significantly in OXY.

Berkshire invested in Occidental Petroleum, symbol OXY, and now has an $14.1 billion stake in the firm.

Berkshire Hathaway now owns 248,103,025 shares of Occidental Petroleum, representing an increase of 15,845,037 over last quarter’s holdings.

Occidental Petroleum now represents Buffett’s sixth largest equity holding with only his favorite firms eclipsing it, those being in descending order Apple, Bank of America, American Express, Coca Cola and Chevron.

A sign of Berkshire’s enormous size can be seen in the fact that Berkshire’s $14 billion holding represents just 4.06% of the overall equity portfolio.

Other noteworthy investors in OXY include Dodge & Cox, who own a 9.229% stake, Vanguard Fiduciary Trust which owns 6.475% and State Street Corporation with a 4.571% stake.

Why Buffett Is So Bullish On OXY?

In his recent and widely read annual shareholder letter, Buffett wrote that, like Coke and AmEx, two other holdings have made the cut into this “maintain indefinitely” bucket.

The first is his investment in five Japanese companies and the second is his Occidental Petroleum holding, both of which he chose to increase stakes in this year.

The signs were plain to see that Buffett was enthusiastic about OXY when Berkshire filed for regulatory approval to own up to 50% of its shares.

As of now, Berkshire owns 27.8% of Occidental Petroleum’s shares but it’s clear that he has ambitions to further increase his stake if possible. Price, as always, is the determinant of his transactions.

A primary reason for Buffett’s optimism is that Occidental Petroleum has enormous reserves within the United States. This stands in sharp contrast to the position the US was in just a few decades ago, when it seemed heavily dependent on oil imports. 

Without a reliance on OPEC dictating prices to US importers, the United States has greater autonomy over its own energy needs.

Another reason for Buffett’s enthusiasm is, undoubtedly, his faith in its CEO, Vicki Hollub. If you were to step behind Buffett’s desk and attempt to analyze companies the way he does, two primary criteria are used to assess enterprises. The first is a qualitative test and the second a quantitative test.

If a company has strong fundamentals and good economics, the quantitative test can be passed but equally important is strong leadership and a wide moat. The qualitative factors a company possesses are astutely observed by the Sage of Omaha. 

Vicki has long been complimented by Buffett for being a great steward of the firm, and so he is betting with Berkshire shareholders dollars that she will continue to be a driving force in OXY’s success.

Finally, Occidental Petroleum appears to have commanded a leadership position in carbon capture, a market that some estimate could be as large as $3 trillion on the low end.

Buffett acknowledges that the economics of this industry have yet to be proven but the optionality exists should they play out as forecast.

OXY’s Rocky Ride

For those new to Occidental Petroleum, it’s probably worth the quick history to lesson to note that the current tailwinds and rosy views of the company haven’t always been the case.

It wasn’t long ago at all – in fact it was 2019 and the years prior – when the company was paying out a considerably larger dividend.

When that was slashed, Occidental Petroleum share price tumbled with it. Many investors who had followed Buffett into OXY felt the pain of a crumbling portfolio as OXY shares nosedived and the dividend was slashed.

One shareholder who didn’t panic sell was Buffett. As the dividend plunged, Buffett knew management was getting the balance sheet back in order from being heavily indebted to holding stronger liquid reserves.

He had an investment thesis and was willing to ride through the storm to the greener pastures on the other side when the assets could be exploited but without the heavy debt burden dragging down financial performance.

The thesis has played out marvelously with Occidental Petroleum up 6x fold over the past 3 years from $10 per share to $60 per share.

It seems there is no slowing down the oil and gas play now and Buffett is committed to the long-term. For those who want to follow along with Buffett, owning shares of OXY now actually seems to be a much safer bet than when its balance sheet was perched precariously on the verge of insolvency with liabilities stacking up and reserves diminishing. 

Certainly, the share price doesn’t make for as compelling a buy but the reward to risk ratio, ironically, looks a whole lot better than the alternative a few years ago, which was bankruptcy and a total loss of capital. 

Buffett clearly had faith that management would act in the best interests of shareholders and, so far, he has been proven correct. The odds are with his conviction to hold the stock for the foreseeable future, he believes OXY will be a huge winner over the long-term. 

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