By the end of 2020, the pandemic-related slump in oil and gas prices had ended and the price of oil began a climb that peaked at nearly $130 a barrel earlier this year after the invasion of Ukraine. by Russia.
The price rally turned Occidental into an ATM, allowing it to reduce its debt to about $32 billion, resume paying dividends and undertake some share buybacks. Its share price, which had fallen below $10 at its lowest point, soared to as high as $70.
In March, Buffett began buying, initially acquiring 14 percent of Occidental in less than a fortnight. He has moved on ever since and now, paying between $50 and $60 a share, has amassed more than 20 percent, plus his preemptive rights and warrants.
Buffett’s preferred stock is not redeemable until 2029 unless Occidental has paid $4 per share on its common stock as dividends or buybacks in a prior 12-month period.
With cash flowing through the pool, that could happen this year, with Buffett losing what has been a very attractive annuity income stream in an ultra-low interest rate environment. He would also be faced with the decision to make a profit of approximately $800 million from the exercise of his warrants.
Instead of cashing out, Buffett has doubled down on a variation of his traditional approach to investing countercyclically, or “buying straw hats in winter.”
He has clearly taken a contrarian view on the outlook for oil and gas prices despite the bearish scenarios that have been painted for the sector.
In this case, you are buying in line with the short-term cycle of rising oil prices and started when that cycle was already underway; classically, you should have been buying when the pandemic caused oil and gas prices to crash.
That suggests he doesn’t think rising oil prices are cyclical, and he may be right.
The Russian invasion of Ukraine has pushed up oil and gas prices, particularly gas prices, and will have a lasting impact on the market. Whether or not Russia is able to maintain its oil production and sales as Western sanctions mount, the painful lesson Europe has learned about the risks of its overreliance on Russian gas will be long-lasting.
In a market where gas supply is tight, with long lead times and rising costs for new production, the addition of Europe’s massive energy requirements alongside market demand will put a high floor under international gas prices. in the foreseeable future.
The global response to climate change should also support oil and gas prices. Gas, because it can play a role in energy security even as the share of renewables in power grids increases, should be a particular beneficiary.
Investment in fossil fuel production has been constrained both by international commitments to reduce carbon emissions and by the pandemic. Oil majors are reducing or refocusing their capital spending and smaller companies like Occidental are more focused on generating cash than expanding production.
The relatively new discipline of Occidental (and its US onshore oil and gas peers) in prioritizing cash generation over yield-depressing investment in rising production would appeal to Buffett.
Buffett also likes “moats” and the moat around oil and gas is deepening as the international response to climate change becomes more urgent.
He has clearly taken a contrarian view on the outlook for oil and gas prices despite the pessimistic scenarios that have been painted for the sector and is particularly bullish on Occidental, one of the largest producers in the highly productive Permian Basin that it straddles Texas and New Mexico.
Occidental has an ambitious plan to be a leader in the industry’s response to pressure to reduce carbon emissions, with a goal of net-zero emissions by 2050. It has invested in a Canadian company, Carbon Engineering, and plans carbon capture and storage. carbon facility in the Permian Basin as part of a vision to have 70 such plants operating by 2035 and up to 135 eventually.
There are many people who are skeptical about the economics and effectiveness of carbon capture and storage technologies, but there is another aspect to Occidental’s plans.
The recently enacted Inflation Reduction Act in the US offers tax credits for carbon capture. Occidental could receive credits of up to US$180 per ton of carbon it captures and stores, altering the economics of the process.
Buffett may or may not take advantage of the potential to buy up to 50 percent of Occidental that was approved by the Federal Energy Regulatory Commission last week and may or may not seek, as some believe he might, to deploy some of Berkshire Hathaway’s $ . US100 billion of cash reserves to acquire the entire company.
The decline in Occidental and Chevron, however, indicates that Buffett, the world’s most revered value investor and a man of his own convictions, sees value in a sector that others are increasingly avoiding due to pressure from governments. climate activists and the increasingly powerful. environmental, social and governance frameworks increase.
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