Last week, it emerged that Warren Buffett has been buying shares in Occidental Petroleum (NYSE: OXY). Doing so takes his company Berkshire Hathaway‘s ownership in Occidental to around 12%. And it has warrants to increase its ownership of the company to around 20%. That makes Occidental a big part of Berkshire’s investment portfolio
Buffett’s most recent purchases were made at an average price of $56.60. On the face of it, this is a strange time to be buying shares in oil companies. The price of oil is high and oil stocks are up as a result. So why is he buying Occidental stock at $56 when he wasn’t buying earlier this year at $33?
Oil
Buffett has said before that an investment in Occidental Petroleum is a bet on two things. The first is the price of oil. The second is the Permian Basin, where most of Occidental’s operations are based. I think that Buffett’s most recent investment is the result of his belief that the outlook for US oil just got a lot better than it was earlier this year.
Last week, the US announced a ban on imports of coal, oil, and gas from Russia. Similar measures have been taken by the UK and Australia. Russia is the world’s third-biggest producer of oil, behind the US and Saudi Arabia. Banning Russian imports is therefore likely to mean that the US has to rely more on oil extracted domestically.
I believe this is the catalyst for Buffett’s purchase last week. I think he is taking the view that the market is not adequately appreciating what US decision to ban imports of Russian oil means for Occidental’s business. If I am right, the answer to the question of why he is buying Occidental shares now when he wasn’t in January is that the company’s prospects have improved dramatically.
Airlines
As I see it, the Occidental buy is similar to Buffett’s decision to sell Berkshire Hathaway’s airline holdings in 2020. Surprisingly, this happened at a time when travel restrictions were weighing on airline share prices. So it resulted in a substantial loss for Berkshire’s shareholders.
By way of explanation, Buffett pointed out that the outlook for the airlines themselves had been significantly worsened by the pandemic. They had substantial amounts of debt and had to raise funds by issuing shares. Worse, they had fixed costs that would cause them to keep losing money until full demand returned. In other words, Buffett sold the airlines because a sudden change meant that they were no longer attractive from an investment perspective.
I think Buffett’s most recent investment in Occidental is the result of a judgement that the company’s prospects have suddenly improved. Just as his decision to sell airlines wasn’t influenced by where the share price had been or might go, I don’t think considerations about the price of Occidental stock earlier this year influenced his decision to buy the company’s shares last week.
From the perspective of my own portfolio, I don’t anticipate following Buffett into Occidental Petroleum. As I don’t have his insight into oil, I’m unlikely to buy shares in Occidental, or even Royal Dutch Shell or BP. Personally, I’d rather buy Berkshire Hathaway shares and let the Oracle of Omaha look after investing in oil for me!