“I only invest in stock companies whose business model I understand.” This stock market wisdom comes from, you guessed it, Warren Buffett. In fact, the U.S. star investor and billionaire is a staunch believer in the old economy. It is true that Buffett has softened this principle somewhat in recent years with investments in the tech companies Amazon and Apple.
Nevertheless, “classic” companies still play a major role in the portfolio of his investment company Berkshire Hathaway. These include consumer goods giants, banks, credit card companies and, not least, commodity players.
Star Investor Backs Big Oil
Buffett has now made a big investment in the latter in particular. In the first quarter of 2022, the investor drastically increased his holdings in large oil companies and thus probably profited handsomely. Because of rampant inflation and the Ukraine war, oil prices have shot through the roof – as have Big Oil’s profit margins.
Importantly for you, Berkshire Hathaway’s increased exposure to the oil sector is a signal to the stock market that Buffett and his analysts expect prices for the fossil fuel to remain high in the months and perhaps even years ahead.
Occidental Petroleum: Buffett’s Oil Darling
One of the companies that Buffett trusts is Occidental Petroleum (OXY). The US company specializes in the exploration, production and processing of oil and natural gas.
Oxy has production sites in the USA, the Middle East, Africa and Latin America. In addition, there are chemical plants in which the company uses the energy raw materials to manufacture chlor-alkali products, for example. These chemical compounds are used in the pharmaceutical and fertilizer industries, among others.
Buffett had significantly upped his stake in OXY in March. Berkshire Hathaway now holds more than 14% of the oil giant. For the billionaire, this is a goldmine. Oxy shares have risen by around 90% since the beginning of the year.
Occidental Petroleum Benefits From High Oil Prices
The reason is clear: Occidental Petroleum is profiting massively from the oil price boom. Last year alone, the commodities group’s sales shot up by 47% to almost $26 billion. Net profit amounted to $2.3 billion. By way of comparison, in the previous year, 2020, the company posted a loss of $14 billion due to the corona-induced drop in oil prices.
And things are likely to continue at a similarly strong pace for the company in 2022. The analysts at Goldman Sachs, for example, expect an oil price of $135 per barrel (Brent) for the current year. That would be another 32% increase over the current oil price (as of 04/25/2022, 3:00 p.m.).
Is Buffett Simply Buying Up OXY?
But now back to Buffett: Industry experts believe it is even possible that the billionaire could take over Oxy completely. The star investor has maintained close relations with the management of the oil company for years and, according to his own statements, is firmly convinced that the company will be successfully managed.
In addition, Buffett traditionally prioritizes companies that are primarily active in the USA. Oxy generates about 80% of its output in the United States, according to company data. And last but not least, with a market capitalization of about $53 billion, the company would be quite affordable for Berkshire Hathaway.
For Oxy, an acquisition by Buffet or Berkshire would be quite positive. In recent years, the oil giant has had to contend with activist investor Carl Icahn, who has repeatedly voiced sharp criticism of the company’s policies. In the meantime, Icahn has sold his Oxy stake, clearing the way for Buffett. Buffett could bring more stability and calm to Oxy, which should also benefit the share price.
It Remains Exciting
Whether the billionaire is already in talks with the Oxy management is not yet clear. The share is therefore currently hanging somewhat in the air. Now it is called: Wait and see. For you as an investor, it remains exciting. I will of course keep you up to date here at this point.