Warren Buffett.
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Warren Buffett’s Berkshire Hathaway has bet big on Chevron and Occidental Petroleum this year.
Josh Young said Buffett likely felt both companies were undervalued, and trusted their management.
The energy-stock guru also highlighted the pair’s scale and how crude prices affect their profits.
Warren Buffett’s Berkshire Hathaway has unexpectedly piled into oil-and-gas stocks this year, building a $25 billion position in Chevron and a $12 billion stake in Occidental Petroleum.
Josh Young, the founder and chief of Bison Interests and a specialist in energy stocks, outlined Buffett’s potential rationale during a recent episode of the “We Study Billionaires” podcast.
Buffett and his team are likely bullish on energy prices, which have surged on the back of Russia’s invasion of Ukraine disrupting global supplies, Young said.
They probably determined that both companies were undervalued and admired their management teams — and they were likely also limited to picking an industry player large enough to move the needle on Berkshire’s finances, he continued.
“Chevron is probably the best-run megacap integrated producer,” Young said. “Oxy — at the time that he started to buy it in March — was the cheapest producer with the most upside to higher oil prices.”
Young explained that Occidental makes more money when oil prices rise than its competitors do, describing the pronounced impact as the company’s “cash-flow torque.”
He also highlighted Occidental’s aggressive debt repayments, its CEO Vicki Hollub’s clear plan to revitalize the company, and its focus on returning capital to shareholders. All are undoubtedly attractive to Buffett, he believes.
However, Young noted that both Chevron and Occidental suffer from diseconomies of scale, as it’s difficult for them to run as efficiently as some of their smaller rivals.
They also own mediocre legacy assets and face governance issues, he added. For one, Chevron’s headquarters are in California, meaning its management policies are more aligned with other companies in that state than with its Texan peers.
Young cast doubt on whether Berkshire, which has purchased 188 million shares or more than 20% of Occidental this year, should continue to grow its stake. He questioned why Buffett and his team don’t invest in another energy company, given many of them have slumped in value in recent months, while Buffett’s stamp of approval has kept Occidental’s price afloat.
Still, the Bison boss said Buffett’s deep affinity for the stock was noteworthy, and he raised the prospect of a full takeover of the company.
“He just keeps buying the stock in a way that’s very unusual for Berkshire,” Young said.
“I think it’s a very strong signal that he means business. He wants to own it. And he wants that exposure to potential higher inflation, higher oil prices, and really believes in it.”