Warren Buffett is currently sitting on more cash than he has good ideas to invest in. Berkshire Hathaway's (NYSE: BRK.A) (NYSE: BRK.B) cash and Treasury holdings could exceed $300 billion by the end of the third quarter. That's driven by Buffett's recent decisions to sell stocks from Berkshire's equity portfolio without reinvesting the funds into new holdings. Buffett's sold more stocks than he bought in each of the last seven quarters.
That trend is extremely evident these days. Buffett has sold over $7 billion worth of Bank of America stock since the start of the third quarter. Meanwhile, one of the few stocks that he's consistently bought over the last two years is sitting near a two-year low, but he hasn't purchased any additional shares.
In 2019, Berkshire Hathaway paid $10 billion for preferred shares of Occidental Petroleum (NYSE: OXY), including warrants to purchase shares at about $60 each. Over the last two years, Buffett's consistently bought shares whenever they traded below that $60 price while letting Occidental retire his preferred shares. But with Occidental shares falling close to $50, Buffett hasn't added any more to his position.
Buffett said he plans to hold Occidental shares indefinitely in his 2023 letter to shareholders. But he no longer seems interested in acquiring more.
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Occidental is far more sensitive to the price of oil than other integrated operators. It's heavily concentrated on extracting oil from bedrock relative to other oil and gas companies, which means when oil prices fall, Occidental's earnings fall, too.
Since the start of the third quarter, the price of West Texas Intermediate crude oil has dropped about 15%. The price dipped below $70 a barrel earlier this month before a slight recovery. That's an important price for Occidental, which said last year's CrownRock acquisition will increase free cash flow by $1 billion based on a $70-per-barrel price for WTI.
That CrownRock deal also left Occidental with a high level of debt on its balance sheet. Management is strategically divesting assets to accelerate its debt paydown. CEO Vicki Hollub expects to reduce the debt on its balance sheet from around $19.7 billion to $15 billion by the end of 2026 or the first quarter of 2027. The company retired $3 billion of debt in the third quarter, putting it well on its way toward that goal.
But it'll be slower going from here, requiring excess cash flow to go toward that debt reduction. And with oil prices slumping, that cash flow won't be nearly as much as when oil prices were up in the $80 range.
Hollub's aggressive maneuvers in the industry show confidence in the price of oil bouncing back. And Buffett's past purchases and praise for Hollub suggest he's also bullish on the price of oil long-term. But the knife cuts both ways, and right now it's hurting Occidental.
Should investors stay away or pounce on the opportunity?
Occidental is one of Buffett's biggest holdings. As mentioned, he's consistently added to his position in the company over the last two years whenever shares were priced below $60. As a result, Berkshire Hathaway now owns about 28% of the common stock of the company.
Buffett said he doesn't plan to acquire a majority stake in the business, and perhaps he's happy with the current level of investment in the company. With the pressure on Occidental's cash flow, it's unlikely to retire as much of his preferred shares for some time, and he receives an 8% dividend on the remaining $8.5 billion investment.
The vast majority of Buffett's stake was acquired for prices between $55 and $60 per share. With shares currently trading closer to $52, investors are getting about a 10% discount on Buffett's average price.
Despite the financial challenges for the company outlined above, there are reasons to be optimistic about Occidental. For one, its portfolio of assets, particularly in the Permian Basin, give it an enviable position for its upstream segment. It has cheap access to oil as a result, and when oil prices climb higher that position pays off in strong earnings for the business.
Additionally, Occidental is investing heavily in carbon capture technology. It recently received a $650 million award from the U.S. Department of Energy to build a Direct Air Capture (DAC) Hub in South Texas. Occidental plans to commercialize projects like its DAC Hub with the sale of carbon credits for companies to offset their emissions with some sales already lined up. Over the next few decades, carbon capture could balloon into a multitrillion-dollar industry. Buffett is also bullish on Occidental's efforts in carbon capture.
At its current price, Occidental shares trade for an enterprise-value-to-EBITDA ratio of about 5.4. That's a discount to its larger peers. And given the current price of oil and the company's financial standing, perhaps it should trade at a discount. But investors bullish on the price of oil and the long-term prospects of carbon capture may want to take a closer look at Occidental shares at their current price.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.