Over the last couple of years, Warren Buffett has been a seller of stocks. Berkshire Hathaway (NYSE:BRK.B) has even reduced its stake in the likes of Apple and Bank of America.
Despite this, Buffett (or one of the other Berkshire investment managers) has consistently been buying shares in Occidental Petroleum (NYSE:OXY). And this just got interesting.
Takeover time?
With $300bn in cash, Berkshire clearly has the means. And having bought Occidental shares at prices well above the current level, it might well also have the motive.
In the past, Buffett has always ruled out buying the company outright. I think, however, that a key obstacle to this might have just been removed.
Occidental hasn’t previously shown signs of wanting to be acquired. But according to Forbes magazine, CEO Vicki Holub has stated a Berkshire takeover bid would be “a dream come true”.
I think that makes Warren Buffett moving to acquire Occidental Petroleum much more likely. And as a Berkshire Hathaway shareholder, I’m looking very closely at this situation.
Occidental’s strengths
Despite its recent poor share price performance, Occidental does have some important strengths. The most obvious is its position in the Permian Basin.
This allows it to extract oil at relatively low prices without the risk of an unstable political regime. That’s a big advantage, but it’s not the only attraction.
Occidental has also invested heavily in carbon capture initiatives. And Berkshire Hathaway – with a big utilities subsidiary – might be particularly well-placed to appreciate this.
Buffett has often said that wind and solar alone aren’t adequate energy sources. So it’s easy to see the attraction of something that can reduce the environmental impact of hydrocarbons.
Risks?
Buffett is notorious for insisting on a wide margin of safety when it comes to investing. But as a Berkshire shareholder, I think there are clear risks to pay attention to.
In fact, I think oil stocks in general are unusually risky. A lot comes down to the price of oil, but things can develop in unfavourable ways both on the supply side and on the demand side.
Just in the last month, OPEC+ has been talking about phasing out production cuts, which would increase supply. US economic growth also turned negative, which is bad for demand.
These kinds of developments tend to be cyclical, but that means they never really go away. And the price of oil inevitably impacts the profitability of all oil companies – including Occidental.
Is now the time?
Berkshire has the means and – I think – the motive to buy Occidental outright. And if the company really is interested in doing a deal, it might be about to get the opportunity.
Oil prices just hit 52-week lows and the the oil company’s share price is down almost 40% from where it was a year ago. At these levels, I think a takeover makes a lot of sense.
If Occidental is interested – and it looks like it might be – a deal could be on the cards. Berkshire’s annual shareholder meeting is coming up and I’ll be watching closely.
