The energy holdings of Warren Buffett’s Berkshire Hathaway are in flux, with news that oil major Chevron recently mulled buying fellow Berkshire energy holding Occidental Petroleum.
According to a report in The Wall Street Journal, Chevron was considering an acquisition of Occidental earlier this year but its interest has since faded. The potential deal would have united two of Berkshire’s largest energy investments under one roof.
Berkshire has been steadily building its position in Occidental Petroleum, buying up over 25% of the company’s shares over the past year. Meanwhile, it has trimmed its stake in Chevron. This likely means Buffett sees more long-term value in Occidental. However, a Chevron-Occidental tie-up could have made strategic sense, giving Chevron access to Occidental’s prime Permian Basin assets.
The backstory here is that Occidental acquired Anadarko Petroleum back in 2019. To do so, it beat out Chevron which had initially proposed acquiring Anadarko. That left Chevron still hungry for Permian shale assets. Occidental gave Berkshire preferred shares and warrants for billions of dollars in financing assistance with the Anadarko deal.
Chevron’s rumored interest in Occidental has since passed. But it is still eyeing smaller acquisitions to bolster its upstream portfolio. And other deals are shaking up the Permian shale patch. Exxon Mobil is said to be in advanced talks to acquire Permian driller Pioneer Natural Resources for around $60 billion.
The potential Exxon-Pioneer deal helped boost Occidental and other Permian players late last week. But it wasn’t enough to buoy the struggling energy market amid fears of a global recession killing fuel demand.
Crude oil has dropped below $90 a barrel, far from its March peak above $130. Gasoline futures are down over 20% in the last month as well, hurting refiners like Chevron. This is likely dampening Chevron’s appetite for big acquisitions, even as its stock price remains relatively resilient.
Berkshire’s decision to realign its energy exposure remains a bet on Occidental’s potential for long-term growth. But it has created near-term pain. Occidental shares have plunged over 50% from their April peak, though they still remain significantly above year-ago levels. Chevron has outperformed Occidental lately, but still nurses a 16% year-to-date loss.
Looking Forward for Berkshire Energy Holdings
While its energy investments face headwinds, Berkshire is still well-positioned in the space. Its Occidental warrants give it the right to buy tens of millions of additional shares at $59.62 each. Given Occidental’s low valuation, these warrants are likely deep in the money already.
Occidental’s aggressive share repurchase program is also helping Berkshire by boosting its ownership stake. And its Permian assets remain best-in-class; production is expanding while costs are kept low. If crude prices rebound, Occidental could again become a hot takeover target.
Chevron may also get more acquisitive if oil and gas prices stabilize. It boasts a pristine balance sheet and plenty of excess cash flow to fund deals. Its dividend growth outlook also remains intact regardless of any deals.
In the meantime, Berkshire can take comfort from the over $120 billion in cash on its balance sheet. It has plenty of dry powder to deploy if any panic-driven bargains emerge across the energy sector. And the insurance businesses that fuel Berkshire’s investments continue humming along.
Berkshire’s patient investing approach means its energy holdings may underperform at times. But Buffett is unfazed by near-term volatility. He will likely continue building positions in quality energy companies with proven assets like Occidental and Chevron. The rewards may take time to realize, but his track record speaks for itself.