Warren Buffett probably liked it
second quarter earnings report.
Occidental Petroleum (Ticker OXY), in which Buffett’s
(BRK/A, BRK/B) is the largest shareholder, beat earnings estimates, paid off nearly $5 billion in debt, and is now poised to return more cash to shareholders.
However, Occidental shares were down 1.3% in after-hours trading at $64.20.
Occidental bought back $1.1 billion in shares through Aug. 1, with about half coming in July and half in the second quarter. Berkshire’s holding 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 up sharply from 32 cents in the prior period.
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 in its earnings a proportionate share of Occidental’s profits. That would boost Berkshire’s reported earnings by about $2 billion, though there wouldn’t be much cash tied to those earnings.
“Oxy is killing it with increasing book value per share,” said Cole Smead, co-manager of the Smead Value fund, which owns Occidental. “Where else can you find a company that’s growing book value that fast.” He estimates that Occidental grew its net worth per share by about 11% during the period, while earning a huge return on capital.
Occidental’s strategy in recent quarters has been to use its massive free cash flow to pay down debt, which stood at $21.7 billion as of June 30, and effectively transfer wealth to shareholders who now own a larger stake in the business. Smead and others believe Berkshire CEO Buffett is excited about this strategy.
Berkshire owns nearly 20% of the common stock, holds warrants to purchase 83.9 million shares of Occidental at $59.62 a share, and owns $10 billion of 8% preferred stock.
Looking ahead, Occidental will focus more on returning cash to shareholders than paying down debt. That could include a higher dividend, which is now low at 52 cents a year for a yield of less than 1%. Most energy companies return significantly more money to holders than Occidental.
In 2023, Occidental could start paying Berkshire’s preferred high rate. According to a formula, the company must start paying out preferreds if it returns more than $4 per share to its common holders in a given year.
Investors will be interested to hear from Occidental CEO Vicki Holub during the company’s conference call Wednesday morning for more information on capital distribution, dividends, debt reduction, energy production and any clues about Berkshire’s intentions. Some believe Buffett may want to buy the rest of Occidental after rapidly increasing Berkshire’s stake in recent months. Berkshire could not be reached for immediate comment.
Smead thinks Occidental shares, which have doubled this year and are the top performer in the S&P 500, still look attractive. It now trades for just six times earnings. “It’s demonstrably cheap compared to anything else you can do with equity.” He values 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, obtaining about 80% of its more than one million barrels per day of energy production domestically. And Buffett loves American companies.
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