Warren Buffett has put a lot of money in his hands in recent years.
By the end of 2021, their holding company Berkshire Hathaway’s cash pile had grown to a record $ 146.7 billion. It should not be surprising. Buffett is a valued investor, and valuations have swelled in the US stock market after significant rallies in 2020 and 2021.
In a recent Berkshire shareholder letter, Buffett said, “We have found little that motivates us.” But by 2022, Berkshire is loading up on the oil and gas giant Occidental Petroleum (OXY).
In the past week, Berkshire has spent more than $ 500 million to acquire another 9.6 million shares. That brings Berkshire’s total stake in OXY to 152.7 million shares, valued at approximately $ 8.5 billion.
Let’s take a closer look at this move and figure out whether investors should follow suit.
Great bet on big oil
The truck was backed up in Berkshire OXY following the company’s earnings conference call in late February. Buffett read the transcript and liked what he saw.
“I read every word and I said I was doing it.
In Q4 of 2021, Accidental posted revenues of $ 8.01 billion, representing a 139% increase year-over-year. Adjusted earnings per share came in at $ 1.48, which is a significant improvement over the adjusted loss of 65 cents per share over the year-ago period.
In a conference call, Hollub highlighted Accidental’s strong operating results, improved balance sheet and new shareholder-return framework.
On February 24, the board of directors of the company announced a regular quarterly dividend of 13 cents per share on OXY common stock, an increase of 1,200% over the previous quarter’s payout of just 1 per cent. The company also announced a $ 3 billion share repurchase program.
Three months later, in 2022, we learned that things were improving. In Q1, OXY reported earnings of $ 8.53 billion and adjusted earnings of $ 2.12 per share.
While Berkshire’s latest bet on Big Oil is making headlines, Buffett is not the first to invest in Accidental.
In 2019, Berkshire will spend $ 10 billion on Accidental Preferred Shares to help buy its fellow Houston-based energy producer, Anadarko Petroleum. Accidental pays 8% annually on that preferred stock, giving Berkshire $ 200 million in dividend income each quarter.
The system warrants Berkshire to purchase 83.9 million shares of Occidental common stock at an exercise price of $ 59.62.
Hot stock in hot space
Strong commodity prices will benefit oil producers more in 2021. Of the 11 sectors of the S&P 500, energy is performing well in 2021, returning an impressive 53%, significantly exceeding the S&P 500’s 27% profit per year.
That gap in performance has only widened in 2022. In the same time frame, the energy sector has already risen more than 20% year-over-year against the S&P 20% decline.
It’s not hard to understand why: oil prices are already in clear upward trend before the Russian invasion of Ukraine will further fuel the rally.
The rising tide has lifted all boats, but Accidental has outperformed most of its peers, returning 80% already in 2022.
Will the rally continue?
Although investors enthusiastically bid for shares, most profits may be on the horizon.
In April, Raymond James increased its price target on OXY from $ 85 to $ 90 and maintained a strong buy rating. Shares now trade for about $ 56 a piece.
Last month, Mizuho reiterated its buy rating on OXY as it raised its price target from $ 85 to $ 89 – roughly 59% of where the stock is today.
This article only provides information and should not be construed as advice. It is provided without warranty of any kind.