Warren Buffett and Charlie Munger explain why they bought Occidental Petroleum stocks. This encompasses everything they ever said about them buying Occidental Petroleum shares.
In 2019, Warren Buffett lent $10 billion to Occidental when they attempted to purchase Anadarko. Anadarko had already entered into a deal with Exxon, but Occidental, with the backing of Warren Buffett, could submit a higher bid and ultimately secured Anadarko just ahead of Exxon.
Buffett is known for his swift deal-making, and this transaction was struck on a Sunday at the beginning of 2019.
Unfortunately, the oil market collapsed 12 months later due to the impact of COVID-19, and it seemed as though Buffett had made a terrible deal.
Now, with the resurgence in oil prices, Warren Buffett has approximately $14 billion invested in Occidental Petroleum, and he has developed a strong affinity for the company.
This is the extent of what both Warren Buffett and Charlie Munger have ever disclosed about the original Occidental deal in 2019 and the subsequent developments in the months following the deal
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Here's what he says in the video:
When you buy into an oil — a huge oil production company — you know, how it works out is going to depend on the price of oil to a great extent.
It is a investment that depends on the price of oil
You should only own oil, if you expect these prices to go up significantly.
When the management of Anadarko favored Chevron. And Chevron had a breakup fee of a billion dollars and the Occidental people had been working on it for several years
It was attractive at oil prices that then prevailed
And everything the oil companies have been doing, whether it’s Exxon or Occidental or anybody else, it doesn’t work at these oil prices
That’s why oil production is going to go down a lot in the next few years, because it does not pay to drill now.
Oil demand is down dramatically
Now, you will have production of oil go down in the United States significantly. It does not pay to drill in all kinds of formations that paid before, and it doesn’t pay — it doesn’t pay to have paid the price that oil was trading at in the ground a year or two ago.
If you’re an OXY shareholder, you know you’ve — or any shareholder in any oil producing company — you’ll join me in having made a mistake, so far, in terms of where oil prices went
If you’re an oil producer, you take your chances on future prices, unless you want to sell a lot of futures forward. OXY, actually, did sell 300,000 barrels a day of puts, in effect, that — or they bought puts — and sold calls, in effect, to match it. And they were protected on $10 — for a layer of $10 a barrel on 300,000 barrels a day.
When you buy oil, you’re betting on oil prices over time, and over a long time. And oil prices — there’s risk. And the risk is being realized by oil producers as we speak.
There will be a lot of bad loans in energy loans and or— bad debts in energy loans
I would hate to have all hydrocarbons banned in three years, or you wouldn’t want a world that, it wouldn’t work
We have no problem owning Costco or Walmart, and a substantial number of their stores, they sell cigarettes
I think Chevron’s benefited society in all kinds of ways and I think it continues to do so, and I think we’re going to need a lot of hydrocarbons for a long time and we’ll be very glad we’ve got them
I don’t like making the moral judgments on stocks
Chevron’s not an evil company in the least, and I have no compunction in the least about owning Chevron. And if we own the entire business, I would not feel uncomfortable about being in that business
And in the case of Occidental specifically
But we decided it made sense. And two weeks later, we had 14% of the company.
And we also already had a preferred stock and warrants. And the story of the preferred stock is we paid 10 billion — preferred stock and warrants
CHARLIE MUNGER:
I like having big reserves of oil. If I were running the benevolent despot of the United States, I would just leave most of the oil we have here, and I’d pay whatever the Arabs charge for their oil and I’d pay it cheerfully and conserve my own. I think it’s going to be very precious stuff over the next 200 years
WARREN BUFFETT:
I mean, just try doing without 11 million barrels a day and see what happens tomorrow
We use maybe 11 and a fraction — well, we produce 11 and a fraction million barrels of oil equivalent a day.
But if shale stopped, I mean, it would drop to six million very fast. Well, just imagine taking five million barrels a day out of production in the world. And then we’re also taking down our strategic petroleum reserve. Strategic petroleum reserve is the ultimate oilfield. You don’t have to drill. It’s just we’ve got them.
We like Occidental’s position in the Permian
We don’t know what oil prices will be. But we do very much like the Occidental position they have
