Too much cash has been Berkshire’s biggest investing challenge over the past few years. The conglomerate had about $105 billion on hand at the end of June. It is expected to generate about $8 billion in free cash flow each quarter for the next five years, according to Greggory Warren of Morningstar Research Services LLC. Inflation at the highest in 40 years is a great incentive to put that money to work.
Occidental would work better as a subsidiary of Berkshire than a stock holding “given the volatility that exists in the energy/commodity markets,” Warren said. “This could end up, though, evolving into a slow-motion takeover where Berkshire buys up to the stakes that FERC allows it to acquire until it can acquire Oxy whole.”
Occidental is not only one of the biggest producers in the Permian Basin, the largest US oilfield, but it also has one of the lowest costs with an oil price of just $40 a barrel needed to sustain its dividend. West Texas Intermediate currently trades at about $90 a barrel.
Hollub has reined in the “drill-baby-drill” mentality that characterized shale for the first decade of its lifespan and is now prioritizing profits over production. Free cash flow hit a record $4.2 billion in the second quarter.
The Anadarko purchase may have been expensive, but it allowed Occidental to lift its land holdings in the Permian to 2.8 million acres, 14 times the size of New York City’s five boroughs combined. It also added steady, cash-flowing assets in the Gulf of Mexico and Algeria.
Buffett has a good personal relationship with Hollub, which began at the 2019 meeting in Omaha, brokered by Bank of America Corp. CEO Brian Moynihan. This year, the veteran investor praised Hollub after reading a transcript of Occidental’s Feb. 25 earnings conference call in which she pledged financial discipline even as oil prices were rising.
“I read every word, and said this is exactly what I would be doing,” Buffett told CNBC’s Becky Quick in “Squawk Box” in March. “She’s running the company the right way.”
7. Inflation Reduction Act
The oil industry mostly criticized the Inflation Reduction Act that President Joe Biden signed into law this month. The $437 billion legislation “discourages needed investment in oil and gas” and offers “the wrong policies at the wrong time,” the American Petroleum Institute said.
But Hollub was surprisingly upbeat, calling the bill “very positive.” That may have something to do with its expansion of tax credits for carbon capture, of which Occidental is a leading proponent. The company has plans to build the world’s biggest direct air capture plant which will command a tax credit of as much as $180 for each ton of carbon sucked out of the air.
(Photo: Andrew Harrer/Bloomberg)