Like Coca-Cola and American Express, Warren Buffett Sees Occidental Petroleum as a Potential "Forever" Holding

Like Coca-Cola and American Express, Warren Buffett Sees Occidental Petroleum as a Potential “Forever” Holding

In 1988, Warren Buffett famously wrote to Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) shareholders that “our favorite holding period is forever.” That mantra is part of Buffett’s long-term investment philosophy of investing in high-quality businesses run by strong management teams.

While Buffett would love to hold all his stock forever, few stand the test of time. However, one stock Buffett sees as a potential forever holding is Occidental Petroleum (NYSE: OXY). Here’s a look at what Buffett had to say about the oil stock in Berkshire’s latest annual letter to shareholders, as he likened it to his company’s stakes in Coca-Cola and American Express.

An indefinite holding

Buffett wrote in his latest shareholder letter:

This year, I would like to describe two other investments that we expect to maintain indefinitely. Like Coke and AmEx, these commitments are not huge relative to our resources. They are worthwhile, however, and we were able to increase both positions during 2023.

Occidental was one of those investments Berkshire’s investment in five very large Japanese companies was the other.

In discussing Occidental, Buffett noted that Berkshire owned 27.8% of its outstanding shares at the end of last year. In addition, it owns warrants for five more years that give it “the option to materially increase our ownership at a fixed price.” Berkshire received those warrants when it made a $10 billion preferred investment in Occidental in 2019 to help fund its purchase of rival Anadarko Petroleum.

Buffett’s company has received regulatory approval to buy up to half of Occidental Petroleum. That approval, combined with Berkshire’s massive and growing cash position, has led to a lot of speculation that it might seek to buy the oil company.

However, Buffett wrote, “Though we very much like our ownership, as well as the option, Berkshire has no interest in purchasing or managing Occidental.” Instead of buying the whole company, Berkshire will probably continue adding to its Occidental position when it trades at an attractive price to steadily increase its ownership, potentially up to the 50% it has the approval to own.

Why Occidental is a forever holding

Buffett then highlighted the three factors driving his view that Occidental could be an indefinite holding: “We particularly like its vast oil and gas holdings in the United States, as well as its leadership in carbon-capture initiatives, though the economic feasibility of this technique has yet to be proven. Both of these activities are very much in our country’s interest.”

He noted that it wasn’t that long ago that the U.S. was “woefully dependent on foreign oil.” However, thanks to a significant improvement in the economics of shale drilling, the U.S. is now a major oil producer. That means OPEC isn’t the dominant force it once was in the oil market, and Occidental is playing a key role. It has become a major oil producer, which is good for the country.

Buffett also highlighted Occidental’s leadership in carbon capture. The oil company has a long history of using carbon dioxide to coax more oil out of legacy fields by injecting it into oil reservoirs to increase pressure and production through a process known as enhanced oil recovery. It’s now leveraging its expertise in injecting carbon dioxide to capitalize on the massive carbon capture and sequestration opportunity. It’s developing a decarbonization business by building direct air capture facilities that pull the greenhouse gas out of the air. It’s commercializing the technology, which, like its oil production, is good for the country (and the environment).

While it’s not an economically proven technology yet, it could be very good for Occidetnal’s bottom line. Its CEO, Vicki Hollub, believes carbon capture and sequestration could become a $3 trillion to $5 trillion global market. That drives her belief that it could eventually make as much money from the technology as it currently does from producing oil and gas.

Finally, Buffett highlighted Occidental’s management team:

Under Vicki Hollub’s leadership, Occidental is doing the right things for both its country and its owners. No one knows what oil prices will do over the next month, year, or decade. But Vicki does know how to separate oil from rock, and that’s an uncommon talent, valuable to her shareholders and to her country.

Buffett loves to invest in well-managed companies. That describes Occidental under the leadership of Vicki Hollub. She has been a good steward of the company, its oil resources that are crucial to the country, and now the environment by helping spearhead the commercialization of carbon capture technology.

Checks all the boxes of a forever holding

Buffett’s company has built a large position in Occidental Petroleum. While he has no plans to buy the entire company, he expects to hold the oil stock indefinitely because of its importance to the country and strong leadership. Occidental’s large oil business and emerging carbon capture platform position it to grow value for shareholders, including Berkshire, in the future under the adept leadership of Vicki Hollub.

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American Express is an advertising partner of The Ascent, a Motley Fool company. Matt DiLallo has positions in Berkshire Hathaway and Coca-Cola. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.