OXY's Outsider CEO, Vicki Hollub & Warren Buffett's Next AAPL
OXY's Outsider CEO, Vicki Hollub & Warren Buffett's Next AAPL
Here's The Real Reason Why Warren Buffett is Enchanted by the High FCF Yield Occidental Petroleum (NYSE:OXY)
Elevator pitch:
The Buffett Put: Warren Buffett has been acquiring Occidental Petroleum’s (OXY 0.00%↑) shares from the open market hand-over-fist since shortly after the Ukraine war began, accumulating a total of 21.3% of OXY to-date. Berkshire’s excessive cash balance of $128B puts a natural floor on OXY’s common share price, if it ever gets to excessively low territory.
Divd/TSR Yield Capital Allocation Focus: Post-Anadarko acquisition, OXY 0.00%↑’s financial return profile has been reduced to an extremely simple formula — 1) pay down debt, 2) pay down Berkshire preferreds, 3) shareholder return via buybacks and dividends. OXY 0.00%↑ has committed to limiting production growth to 5% CAGR in favor of allocating capital entirely towards shareholder return for the foreseeable future, dramatically reducing uncertainty over shareholder return expectations.
Beginning of Oil Supercycle: Crude oil prices are poised for flamboyant volatility going forward — due to increasingly untenable & highly favorable supply dynamics. Buffett has previously said that an OXY 0.00%↑ investment is a bet on the LT trajectory of oil prices. Many analysts think the ‘OPEC+ put’ puts a floor on oil prices at ~$80.
XOM vs OXY: Buffett’s accumulation of XOM 0.00%↑ shares in 2013 and OXY 0.00%↑ today share many similiarities — namely, both management teams have historically prioritized maximizing ROIC via disciplined cost reductions & improving efficiencies; strict project IRR baselines built around low-cycle commodity prices; and a shareholder return focus based on an optimal capital allocation principle.
Valuations Are Unbelievable: At current share prices, OXY 0.00%↑’s common shares sport a current divd yield of 6% and normalized LT divd yield of 11%. Oil price sensitivity analysis shows an incredible possible distribution of LT shareholder returns. [E&P competitor current divd yields — XOM: 3.2%, CVX: 3.5%, EOP: 2.7%, COP: 4.9%, PXD: 11.8%, MPC: 2.3%, COG: 5.9%, HES: 1.2%, DVN: 9.1%, BP: 3.7%, Shell: 3.5%, Average: 4.7%]
CHAPTERS:
O&G Industry Leaders & Analysts explaining how Oil Prices Today are completely UNANCHORED from Sector Fundamentals (Supply:Demand):
Buffett & OXY
Background Context: Following its $38B acquisition of Anadarko Petroleum in Aug 2019, OXY 0.00%↑ had been nursing its cash flows throughout FY20-21 amidst the low pandemic-era oil price environment. Oil prices had only just begun to rise in 4Q21 (due to inflationary pressures), and the Ukraine war which had begun in earnest just days before implied further upwards trajectory for future oil prices. It was in this context that OXY 0.00%↑ held its 4Q21 earnings call on Feb 25, 2022.
Buffett told CNBC immediately after that he agreed with “every word” in the earnings call, and that Occidental CEO Vicki Hollub was “running the company the right way”. Just days later, he would start acquiring OXY 0.00%↑ shares from Feb 28 — eventually raising his stake to 23.1% of the company as of March 2023.
Management objectives: OXY 0.00%↑'s 4Q21 earnings announcement reads like management took a leaf from The Outsider CEOs book, traced an outline around it, and penned a love letter directly to Buffett. Management repeatedly stresses their commitment towards returning shareholder capital as a business priority; and explicitly notes that the company intends to limit production growth to 5% CAGR for the foreseeable future in favor of returning capital to shareholders. The company framed its medium-term goals as being:
Keep reading with a 7-day free trial
Subscribe to Value Investing for Sophisticated Investors to keep reading this post and get 7 days of free access to the full post archives.