Berkshire Hathaway’s energy investments are an integral part of its top four asset business operations – which is comprised of railways, insurances and portfolio investments (primarily in quoted stocks).
The groups’ energy division has been operative since the early 1990s, and includes power distribution in the US, UK and Canada, as well as gas pipelines in North America.
Confidence in the long-term future of the oil price had already manifested itself, with the additional purchases of Chevron shares by Berkshire (in the past two quarters of 2021) and are currently worth approximately $4.5 billion, ranking it as the ninth largest quoted investment holding.
Berkshire recently announced a purchase of over 100 million Occidental Petroleum shares, resulting in its stake in the company increasing to over 14% (and worth in excess of $7.7 billion).
This follows an initial investment of $10 billion in 2019, in preferred Occidental stock (yielding 8%), and linked to warrants enabling Berkshire to buy an additional 84m shares at a specified price far below that of the prevailing market price.
A strong set of results announced in February, with good management delivery robust cash flows, as well as sound operational efficiencies, were some of the investment criteria for the purchase. Berkshire also highlighted the increase in the quarterly dividend, debt reduction and the share repurchase scheme as positive factors.
Warren Buffet appears to be confident about the long-term future of oil prices, with Goldman Sachs estimating that Occidental to have the second highest cash flow sensitivity to oil prices in the oil majors.
Berkshire Hathaway’s philosophy favors investments generating robust free cash flows, which seems to fit with the Occidental business model. The share is on a potential free cash flow yield of 37% in 2022, and accompanies other attractive and sound financial metrics.
If Berkshire were to exercise the warrants to buy additional shares, the investment could escalate to a 20% shareholding. And in due course, Berkshire could buy out the minorities.
The Warren Buffet strategy has been a winning formula in the past, with sound capital allocation yielding outstanding long term returns for patient investors. We are holders of Berkshire Hathaway for managed portfolios.