Warren Buffett probably liked it
earnings report for the second quarter.
Occidental Petroleum (Ticker OXY), in which Buffett’s
(BRK/A, BRK/B) is the largest shareholder, surpassed earnings estimates, paid off nearly $5 billion in debt and will now return more cash to shareholders.
However, Occidental shares are down 1.3% in after-hours trading to $64.20.
Occidental bought back $1.1 billion in shares through August 1, with about half of that total in July and half in the second quarter. Berkshire’s holdings of 181.7 million Occidental shares represented a 19.5% stake at the end of June. Occidental earned an adjusted $3.16 per share in the second quarter, above the consensus estimate of $3.03 per share and well above 32 cents in the same period a year earlier.
Berkshire’s stake should reach 20% in the coming months as Occidental completes a $3 billion buyback program. A 20% stake would allow Berkshire to include a proportionate share of Occidental’s profits in its profits. That would increase Berkshire’s reported revenues by about $2 billion, although there wouldn’t be much cash associated with those revenues.
“Oxy tops it off with a growing book value per share,” said Cole Smead, co-manager of the Smead Value fund, a holder of Occidental. “Where else can you find a company that grows book value so quickly.” He calculates that Occidental grew its net worth per share by about 11% over the period, while making an inordinate return on equity.
Occidental’s strategy in recent quarters has been to use its ample free cash flow to service debt, which totaled $21.7 billion as of June 30, and to effectively transfer capital to shareholders who now have a larger own part of the company. Smead and others think Berkshire CEO Buffett is excited about this strategy.
Berkshire owns the nearly 20% common stock stake, has warrants to purchase 83.9 million Occidental shares for $59.62 and owns $10 billion of 8% preferred stock.
Looking ahead, Occidental will focus more on returning cash to shareholders than paying off debt. That could mean a higher dividend, which is now down at 52 cents a year on returns of less than 1%. Most energy companies give significantly more money back to holders than Occidental.
In 2023, Occidental may be able to start paying off the high Berkshire rate. According to a formula, the company must start paying off the preferred if it returns more than $4 per share to its common holders in any given year.
Investors will be interested to hear from Occidental CEO Vicki Hollub on the company’s conference call Wednesday morning for more information on capital allocation, dividends, debt reduction, energy production and some idea of Berkshire’s intentions. Some think Buffett may want to buy the rest of Occidental after rapidly increasing Berkshire’s stake in recent months. Berkshire was not immediately available for comment.
Smead thinks Occidental stock, which has doubled this year and is the top performer in the S&P 500, still looks attractive. It now trades for just six times the profit. “It’s arguably cheap compared to anything else you can do with capital.” He estimates it at about $100 a share and thinks Buffett might be willing to pay $90 a share for it.
Occidental is a major energy producer in the US, generating approximately 80% of its more than one million barrels of daily energy production domestically. And Buffett loves American companies.
Write to Andrew Bary at [email protected]