Not to say Warren Buffett’s folksy observation this weekend on the US oil business is incorrect, but it gets something awfully incorrect:
Vicki does know how to separate oil from rock, and that’s an uncommon talent, valuable to her shareholders and to her country.
He is referring to Vicki Hollub, chief executive of Occidental Petroleum Corp., the oil and gas producer in which Berkshire Hathaway Inc. owns a roughly 28% stake. The dispute here isn’t with Hollub’s knowledge of oil production or that this constitutes a talent. Rather, it’s the “uncommon” aspect. The history of the US shale boom, including how Buffett and Berkshire got mixed up with Hollub and Oxy, shows how widespread this particular talent is. It was the skill of turning that into profits for investors that eluded most.
Buffett’s praise of the company’s productive prowess is a throwback to the boom times that isn’t likely to persuade other investors to join him.
We are a mere six weeks or so from the five-year anniversary of Oxy locking horns with Chevron Corp. to buy Anadarko Petroleum Corp. In the end, Oxy prevailed by paying a huge premium, mostly in cash, with Berkshire providing $10 billion of crucial funding in exchange for preferred stock, which had the useful effect for Oxy’s management of avoiding a shareholder vote on the deal (see this for a recap).
It was a pyrrhic victory. Oxy made the classic mistake of overextending itself just as oil prices began falling, which accelerated the following year amid Covid-19. The deal capped a decade of excess in shale where the frenzy for separating oil from rocks saw many an investor separated from their capital.
Oxy’s total return since April 11, 2019 — just before the battle for Anadarko began — up to just before Buffett’s latest letter dropped was a princely 2.7%. The smallness of that number is obvious, but just for context, the oil sector returned about 23 times that, and the S&P 500 about 33 times as much, over the same period. Plus, at an annualized rate of 0.6%, Oxy’s common stock has returned less than one-tenth the coupon it pays on those preferreds it handed over to the Sage of Omaha’s shop.
Dreadful as Oxy’s stock performance has been during this time, even that owes much to Russia’s invasion of Ukraine, which boosted oil prices, as well as Buffett himself. Having helped Oxy dig itself into a hole, Berkshire began buying the stock just after that invasion began and oil began skyrocketing. Regulatory filings show a series of further purchases, generally whenever Oxy’s stock is in the upper $50s, around the strike price of the warrants Berkshire extracted as part payment for its $10 billion (the stock trades just above $60 today).
Read the full article here by Liam Denning of Bloomberg News, Advisor Perspectives
