How does Occidental Petroleum, which Buffett is heavily betting on, make money? Will become the world’s largest carbon capturer

Occidental Petroleum

Company Profile


Occidental Petroleum (ticker: OXY), the company was founded in 1920 and is headquartered in Houston, Texas. It is one of the largest producers of the largest oil field in the United States and the company with the lowest cost (see the table at the bottom of this article for analysis and comparison with Occidental Petroleum’s peers).

Major business units

The company is mainly engaged in the exploration and production of oil and natural gas. It operates through the following business units:

  • Oil and Gas Sector: The Oil and Gas segment explores for, develops and produces oil and condensate, liquefied natural gas and natural gas.
  • Chemicals segment: The Chemicals segment manufactures and sells basic chemicals and vinyl.
  • Midstream and Marketing: The Midstream and Marketing segment buys, markets, gathers, processes, transports, and stores petroleum, condensate, liquefied natural gas, natural gas, carbon dioxide, and electricity.

An exception for Buffett

Why Buffett bet huge on Occidental Petroleum?

In Berkshire ‘s 2023 shareholder letter, he stated: “At yearend, Berkshire owned 27.8% of Occidental Petroleum’s common shares and also owned warrants that, for more than five years, give us the option to materially increase our ownership at a fixed price. Though we very much like our ownership, as well as the option, Berkshire has no interest in purchasing or managing Occidental. We particularly like its vast oil and gas holdings in the United States, as well as its leadership in carbon-capture initiatives, though
the economic feasibility of this technique has yet to be proven. Both of these activities are very much in our country’s interest.”

Wall Street’s view

The market generally interprets this news as Buffett’s bet on long-term inflation in the U.S. economy and believes that crude oil prices will remain high for a long time. When oil companies no longer engage in capital expenditure competition, prices will not drop sharply in the long run. The current Occidental Petroleum Company is equivalent to a walking money printing machine.

Buffett’s own opinion

Buffett said that when you drill a well, you get a lot of oil very quickly, and then the production slowly drops to zero. He likes Occidental’s position in the Permian Basin. Occidental Petroleum has many high-quality oil wells, which is a completely different oil business. And because Occidental Petroleum’s development in the past few years is indeed in line with the commonality of Buffett’s shareholding.

For the commonality of Buffett’s holdings, please refer to my previous article analysis: “”The commonalities of Buffett portfolio – cheap, fixed income, repurchase“.

Why keep increasing holdings?

Buffett revealed in a media interview on March 7, 2022 that he made the decision to increase his stake after reading the full minutes of Occidental Petroleum’s fourth-quarter financial report meeting on February 25, believing that the company is doing the right thing .

How many shares does he has?

In August 2022, Berkshire (tickers: BRK.A and BRK.B) received permission from the Federal Energy Regulatory Commission to purchase up to 50% of Occidental Petroleum’s common stock. Berkshire needs this authorization because, if exercised, it would exceed FERC’s 25% ownership cap.

By the end of June 2023, increase Berkshire’s stake in Occidental Petroleum to 25%, making Berkshire the company’s largest shareholder. Occidental Petroleum Corporation is one of the few Berkshire companies that hold more than 20% of the company’s equity. For this part, please refer to the analysis in my other article: “The companies Buffett owns more than 20%

Many people speculated that Berkshire would eventually acquire Occidental; Buffett, however, said he had no intention of buying Occidental outright, but was still happy with his large investment in the oil company.

Origin of both parties

Buffett first invested in Occidental Petroleum in 2019, when Occidental Petroleum was engaged in a bidding war with oil giant Chevron (ticker: CVX ) for peer Anadarko Petroleum (Anadarko). At the time, Occidental Petroleum CEO Vicki Hollub traveled to Omaha, Nebraska, to convince Buffett to provide $10 billion in financing for her bidding war. With Buffett’s financial support, Occidental Petroleum quickly won the deal.

In exchange, Buffett received a total of $10 billion in Occidental Petroleum preferred stock (yielding 8%), plus warrants to purchase 84 million common shares at $59.62 per share.

Excellent entry opportunity

From the start, the Anadarko acquisition left Occidental heavily indebted (adding more than $30 billion in debt to its balance sheet). Then, as oil prices plummeted after the outbreak, Occidental Petroleum’s market value plummeted from $50 billion before the acquisition in 2019 to less than $9 billion at the end of 2020. But at the same time, this also provides an excellent entry opportunity for Buffett. The increase in crude oil demand caused by the economic recovery after the epidemic and the conflict between Russia and Ukraine are catalysts for fuel prices. Buffett has frequently increased his positions in Occidental Oil since the beginning of 2022.

Fits Buffett’s Taste

Occidental Petroleum is a company favored by Buffett. At Berkshire’s shareholder meeting in 2023, Buffett publicly praised Holub’s management of Occidental: “Holub is an outstanding manager of Occidental Petroleum. Or, we like to have Vicki running it.”

Since the company acquired Anadarko Petroleum in 2019, Holub has been cutting debt and returning money to shareholders.

Holub was the first woman to head a U.S. oil and gas company when she was appointed CEO of Petroleum in 2016. Seven years later, the stock price of Petroleum ranks among the top in the S&P 500 Index.

Stock repurchase

The CEO of Occidental Petroleum has repeatedly stated publicly that excess free cash flow will be used for stock repurchases, and that stock repurchases have a higher priority than increasing oil production.

Redemption of preferred stock

By August 2023, Occidental Petroleum has redeemed some of Buffett’s preferred shares with a face value of US$1.2 billion, equivalent to 12% of Berkshire’s initial US$10 billion investment

Does Occidental Petroleum derail?

Finding new revenue source

Occidental Petroleum, whose main business is oil, is investing heavily in carbon capture. Is it not doing business properly? My answer is no, because the world’s major oil companies believe that the use of oil as energy has no prospects, and are invariably looking for new sources of future revenue for the company.

Please note: Oil still has many uses other than energy, and revenues will still grow, as I mention in my book. This is also the main reason why the market value and revenue of listed oil companies will still increase, and the stock price will not collapse. See the discussion in the following chapters of my book “The Rules of 10 Baggers” for details:

  • Sections 3-7, pp. 166-167, discussion on the energy sector
  • Sections 6-7, page 323

Awarded Amazon’s ten-year contract

Occidental Petroleum’s carbon capture subsidiary 1PointFive said on September 12, 2023 that Amazon (US: AMZN) agreed to purchase 250,000 tons of carbon removal credits from Stratos over 10 years. Stratos is a direct air capture plant the company is building in Texas.

The practice of the industry

One of the most famous examples is Exxon Mobil (ticker: XOM), the world’s largest oil company, which announced its investment in the lithium industry in May 2023, betting on the vigorous development of electric vehicles and opening up a larger source of revenue for itself.

Company performance vs. peers

Business and financial performance

2022 annual revenue and growth rate (in US$ billion)36.634 +41.14%402.217 +44.17%235.916 +52.14%
Gross margin67.07%33.24%38.87%
Operating margin37.3%17.8%17.81%
Net margin36.32%13.86%15.03%

Sstock price performance

Metrics (as of 8/18/2023)OXYXOMCVX
Share price63.91109.56161.71
Market value (in USD billion)56.52438.71308.5
Yield rate1.13%3.32%3.73%
Stock return in past 5 years-18.68%+40.03%+37.23%
Occidental Petroleum
credit: wiki

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