Warren Buffett and big money with “dirty” energy

With his stake in Occidental, the American billionaire is using the decisive lever to benefit from the high oil price and at the same time from Biden’s “environmental protection law”.

Investor Warren Buffett was once again in the right place at the right time and did the right thing economically.

Rick Wilking/Reuters

What happens if, like today, four fifths of the world’s energy is of fossil origin and if the providers are burdened or even hindered in exploration, processing and marketing? Quite simply – they reduce the renewal investments, at some point the supply becomes scarce and finally the price also increases. This is especially true when the markets are additionally distorted by external forces such as the sanctions imposed because of the Ukraine war or the oligopolistic OPEC.

In view of this constellation, who will be surprised that the large oil and gas companies are currently earning more than they have ever done or that clever, anti-cyclical billionaires such as the American Warren Buffett are heavily invested in these sectors and are currently even buying more? In fact, the man from Omaha holds a good 8 percent of the American energy giant Chevron through his holding company Berkshire Hathaway, worth around 26 billion dollars.

Four fifths of the energy used is oil, coal and gas

World energy consumption, in petawatt hours

In this way, he is directly involved in the production and marketing of the products from around 35,000 oil and gas wells around the world. Because Chevron not only refines crude oil and sells the products to end customers via pipelines, ships, freight trains or trucks, but also sells natural gas. The group even has its own gas liquefaction plant and specialized tankers, allowing it to benefit at the moment from the huge boom in the liquefied natural gas (LNG) business, which is being driven primarily by demand from Europe. The operational development is obviously so robust that the value of the share shows an upward trend, at least in the long term.

The development of the US-heavy competitor Occidental was and is even more spectacular. In the first quarter of the current year, the Oracle of Omaha has massively expanded a previously small stake here and not only acquired a stake of 20 percent in the company in the past few months, but also secured the right to buy half or even more be able. Since then, the company’s stock has gone through the roof along with energy prices after being hit hard in 2018, 2019, and 2020.

Production and demand for liquid fuels, worldwide

in millions of barrels per day

Forecast (from June 30, 2022)

Why does Warren Buffett value holdings in traditional energy giants, and why is he so aggressive with Occidental these days? There are a number of reasons for this: First, he seems to assume that inflation is not a temporary phenomenon – and buying shares in conventional energy companies is seen as a natural hedge against its negative effects. Second, Occidental is no stranger to the billionaire. Because he had already provided the company with 10 billion dollars in 2019, when it outperformed rival Chevron in the takeover of former competitor Anadarko. In exchange, Buffett received preferred stock at the time, which had an annual yield of 8 percent, and warrants to purchase additional common stock at $59.62 each, worth billions today.

Initially, the Anadarko acquisition threatened to be a disaster, as Occidental’s balance sheet was burdened with more than $30 billion in additional debt. Amid the pandemic, the energy giant’s market value fell 80 percent to less than $9 billion when oil prices initially plummeted. However, when prices on the oil futures market recovered quickly after the pandemic due to the massive monetary and fiscal stimulus measures and ultimately even rose to up to $130 per barrel of WTI oil due to the Russian invasion of Ukraine, this constellation offered a huge financial leverage.

Gas flame at a Chevron chemical plant in Port Arthur, Texas.  The company is much more than just an oil producer.

Gas flame at a Chevron chemical plant in Port Arthur, Texas. The company is much more than just an oil producer.

Luke Shararrett/Bloomberg

Today, the group from Houston, Texas, is benefiting disproportionately from the favorable circumstances by being able to use the extraordinarily high income to quickly reduce the enormous liabilities and finally to significantly expand the already high cash holdings. No wonder Buffett grabbed it, and no wonder the Occidental papers are the best in the S&P 500 index this year with a plus of a good 150 percent, which is still a good 12 percent in the red.

Occidental Petroleum: Hot bet on the oil price

Course and price development, in dollars

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In fact, Occidental is not only one of the largest energy producers in the Permian Basin, the largest oil field in the USA, but the company can also bring the black gold to the surface at low cost. An oil price of just $40 a barrel is enough for him to maintain the dividend payouts. “Drill, baby, drill” – the motto, which used to focus primarily on mass production in the past, no longer applies for a long time. Today, profit development is the focus of Vicki Hollub, who has been in office for a good six years. In the past year alone, it generated free cash flow of $7.6 billion, which is expected to grow to a good $11 billion this year.

Initially, taking over Anadarko may have been risky and expensive. Today, the group benefits from the fact that it increased its land holdings in the Permian region to 2.8 million acres or the equivalent of 1.1 million hectares and acquired “monetary” production facilities in the Gulf of Mexico and in Algeria.

Chevron – the long-term trend is clearly upwards

Course development, in dollars

Of course, Warren Buffett wouldn’t be what he is if he hadn’t also used his political connections properly and read the signs of the times correctly. For example, a few days ago, the American Congress Inflation Reduction Act passed a legislative package that aims to encourage investments in the fight against climate change and achieve other goals. The oil industry lobbyists initially criticized it heavily because the $437 billion law discouraged “necessary investments in the oil and gas industry” and was the “wrong policy at the wrong time”.

The Occidental boss Vicki Hollub, however, comes to a surprisingly positive verdict. On the one hand, this could have something to do with the fact that new areas are being released for possible development and production in the Gulf of Mexico. Second, the huge expansion of tax credits for carbon capture plays a key role, for which Occidental is a leading advocate. The company plans to build the world’s largest direct carbon capture facility, which will receive a tax credit of up to $180 per tonne of carbon captured.

All in all, Warren Buffett was once again on the spot and quickly seized the opportunity when a favorable opportunity arose.

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