I think Buffett’s abrupt decision to buy OXY shares is not merely because of the earning call, but reflects his view on long-term inflation. Buying oil is a hedge against inflation.
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Hmmm…seems a bit simple.
ANY random company is a hedge against inflation.
Some firms get hit more or less in periods of rising inflation, but on average it’s a wash.
If all labour and prices of materials and services and selling prices rise X%, then a company’s profits will also rise X%.
Not just in theory, but history shows that this is pretty much true.
At least until inflation gets so high and widespread that the economy breaks, but that’s relatively unlikely to be tolerated given how it turned out last time.
Jim
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<<Some firms get hit more or less in periods of rising inflation, but on average it’s a wash.
If all labour and prices of materials and services and selling prices rise X%, then a company’s profits will also rise X%.>>
True. But there’re not easily identifiable cheap businesses on the market now. Also, oil is a worldwide commodity, it’s also a hedge against dollar devaluation. I remember about 10-15 years ago, Buffett bet on devaluation of dollar because of growing trade deficit. The case is even stronger today.
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True. But there’re not easily identifiable cheap businesses on the market now.
Easily identifiable? I definitely wouldn’t count Occidental as one of those.
Their profits are dependent to a large extent on the price of a commodity.
That alone is enough to completely eliminate it from consideration for me.
I’m willing to concede Mr Buffett is capable of juggling a lot more moving parts than I am when analyzing a business.
If he thinks it’s a good pick, it’s probably true.
But I’m unconvinced that it’s anywhere near that simple a bit of reasoning.
If that were it, why not (say) AT&T, or any other number of big firms NOT at the mercy of an unpredictable commodity price?
Or, for that matter, why not wait for a better opportunity in a more target rich environment? That’s his usual default.
No, I conclude he’s figuring some angles that are not quite that obvious.
Jim
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<<why not wait for a better opportunity in a more target rich environment? That’s his usual default.
No, I conclude he’s figuring some angles that are not quite that obvious.>>
My guess is mainly based on the fact that he sit on the sideline in the past two years when the stock price was much lower and the long-term oil expect hasn’t changed much, and then suddenly punched in the past two weeks. The earning call explanation isn’t convincing enough for me. It has to be something changed in the past few months or weeks, and that’s inflation and dollar devaluation.
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It has to be something changed in the past few months or weeks, and that’s inflation and dollar devaluation
Again, seems too simple by half.
I can’t see the current bout of inflation being enough to make Mr Buffett want to spend all that cash in a hurry.
Plus, the US dollar has risen a lot last year and this year relative to other currencies, not fallen, though inflation is an issue most places so it’s the merely best of a bad bunch.
Either way, the changing value of a dollar doesn’t change the value of Oxy as a business appreciably one way or the other.
What matters most to their value, based on the simplest model of their business, is the purchasing power of a barrel of oil.
That, I agree, has gone up for now.
But again, nothing’s that simple.
Jim
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Mungofitch wrote:
If that were it, why not (say) AT&T, or any other number of big firms NOT at the mercy of an unpredictable commodity price?
Or, for that matter, why not wait for a better opportunity in a more target rich environment? That’s his usual default.
No, I conclude he’s figuring some angles that are not quite that obvious.
I think Warren may be taking a page out of the oil majors’ playbooks by vertically integrating some of the hydrocarbon intensive industries under the Berkshire umbrella (BNSF, BHE, Lubrizon, others?). Whereas XOM et al. started as hydrocarbon producers, Berkshire is approaching the same problem from an inverted direction…
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That should be Lubrizol, not Lubrizon!
Also, NetJets seems a likely big consumer of hydrocarbons…
It has to be something changed in the past few months or weeks, and that’s inflation and dollar devaluation.
What’s really changed is the Russian invasion of Ukraine and associated sanctions which spiked the price of oil.
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Generally I’d say that Buffett’s investment in OXY is based on an extremely obvious (for him) thought that is probably not obvious to me or most others. I’d also guess his investment in OXY is far out longer in time than most here can conceptualize.
That said, just remember there is and only ever will be Warren Buffett. The combo of savvy investment skill AND taking care of his shareholders is far above what the next managers will be able to do.
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“No, I conclude he’s figuring some angles that are not quite that obvious.”
Lets throw this theory up on the wall to see if it sticks…
OXY has the largest enhanced oil recovery (EOR) business amongst the US based major oils.
https://www.oxy.com/operations/performance-production/eor/
The vast majority of their EOR operations inject CO2 into the ground to displace oil remaining in the reservoir after the primary recovery.
OXY have been in the CO2 sequestration business for decades. They’ve developed the technology and built out the infrastructure to do it on a large scale (moat). It would take decades for another company to permit and build out what OXY has sitting in their back yard right now.
The cost to purchase and transport their currently naturally sourced CO2 represents ~40% of OXY’s overall EOR operating cost. At the same time, the “world” is moving towards reducing carbon emissions and even reducing CO2 in the atmosphere.
What if OXY could get environmentally motivated (or mandated) 3rd parties to subsidize, even pay OXY to inject same 3rd party’s emitted CO2, or through offsets, as opposed to OXY having to buy it from a natural source and transport in to their aging oil fields?
https://jpt.spe.org/why-oxys-net-zero-goal-carves-entirely-n…
By reducing (eliminating?)the cost of their CO2, OXY’s EOR operating margins would improve significantly. Throw an extended period of $100+/bbl oil and the numbers are better still. OXY’s oil reserves would benefit as currently uneconomic barrels lying in the ground would become “proven” reserves as operating costs are reduced.
OXY management said yesterday in their webcast on the subject that they expect “net zero” barrels of oil to command a premium over WTI. This would bump margins on an incremental barrel of “net zero” oil up even further.
OXY’s EOR process has been historically been deployed across their “conventional” reservoirs. No doubt there is significant future potential for injecting CO2 into their massive “unconventional” (shale) reservoir holdings in the Permian and elsewhere.
https://www.oxy.com/investors/stockholder-resources/lcv-inve…
There are specifics in yesterday’s presentation but if the concept works, OXY stock could command a premium for being the first “green” (ESG friendly) oil and gas company. A fossil fuel company that even Larry Fink might like.
Here’s to dreaming…
And to all the naysayers who say Mr Buffett doesn’t invest in “dreams”:
https://www.businessinsider.com/warren-buffett-dreamed-of-in…
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Or this:
” What follows is a study of unintended consequences and the impacts of massive capital distortions. For nearly a decade, the energy industry has underinvested in its upstream business; it was naive to think this wouldn’t have any impact.
Oil prices stand at eight-year highs, and we believe they are heading higher. How high could crude rally in this cycle? We would not be surprised if prices ultimately spiked to between $150 and $200 per barrel. Natural gas prices reached $300 per oil-equivalent barrel in Q4, and the fundamentals in the oil markets are as bullish,
if not even more so.
Volatility will likely increase as well. Global inventories are at their lowest seasonal levels ever, leaving us extremely vulnerable to any supply disruption, just as geopolitical turmoil seems to be accelerating. OECD inventories peaked in the summer of 2020 at the height of COVID lockdowns at 4.8 bn barrels - 245 mm barrels more than normal for that time of the year. Inventories are currently down to 4.1 bn bbl - 327 mm barrels less than normal for this time of year. Relative to seasonal averages, oil inventories have never been lower in our dataset going
back to 1995.”
http://blog.gorozen.com/blog/the-oil-crisis-is-unfolding-in-…
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Oxy is a very Buffett like operation. They are not in a lot of high-risk speculative plays. They are in steady well-known provinces where future production will benefit from a steady influx of capital investment. Good alternative when the stock is too lofty to buy back.
CO2 based EOR doesn’t sequester the CO2. It is used to recover a relatively small amount of the remaining oil left behind. But most of the CO2 is also reproduced with the oil. The ability of CO2 to flow through the reservoir is much higher than that of the oil. That’s one of the major problems with CO2 flooding - getting good contact with the remaining oil. To keep the CO2 down, you must plug the old producing wells if you’re using the reservoir to sequester it. Some reservoirs are candidates, some are not.
XOM has recovered and sequestered massively more CO2 than OXY.
To sequester CO2 it must be injected in a deep subsurface strata with a strong cap rock that prevents it returning to the surface.
I don’t think CO2 disposal is Buffett’s reason for buying OXY.
Nor do I think it is back integration. Remember both BNSF and BHE are regulated industries. If they get cheaper fuels, they’ll have to pass most of it along to customers. And OXY is not a refiner. NetJets can’t use oil as fuel. Feedstock to Lubrizol is minor.
Until otherwise disclosed, I’ll stick with Buffett’s comment when he first funded OXY. It’s a bet on oil prices.
Not a bad bet for the medium term. The industry has underinvested for years in replacing the 4-6% annual depletion from producing the existing reservoirs. So while demand is recovering from the pandemic, the ability to supply is lagging. When people speak of “spare” production capacity, remember it only takes a year of depletion to soak that up at current estimates. In the oil industry, you must run fast to stay even. It hasn’t done so in recent years.
I read one estimate that there’s about a $20 geopolitical premium in current oil prices. But current oil prices aren’t needed for O&G to be an attractive investment. Both Chevron and ExxonMobil have indicated that their base plans are based on $60 Brent crude - with contingency cases at $40 and $80. Breakeven prices (cover capex and dividend) are around $40 now, and coming down for the majors. XOM has said it can make 10% ROCE in the Permian at SUSTAINED $35 oil prices.
What I’m not clear on is why Buffett prefers OXY to CVX and XOM. They’re both much stronger companies. OXY is more concentrated on oil, so if you’re betting on oil prices that might be the reason. It is also small enough to be a possible candidate for acquisition. I don’t see why Buffett would want to do so on a permanent basis.
But, Buffett being Buffett, he may see reasons that escape me.
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” CO2 based EOR doesn’t sequester the CO2.
You’re wrong, but don’t listen to me or to OXY (after all, what do they know, they’ve been doing it for decades):
https://www.globalenergyinstitute.org/sites/default/files/02…
“The producing operations of a CO2 EOR facility are likely to continue for years, even decades. The CO2 is used during the oil recovery operations (in a closed loop system) and then is permanently sequestered in the formation when the oil production finally stops. At completion of the oil production operations, all the facilities are dismantled and removed from the site. The wells are permanently plugged with a series of cement plugs that seal all the oil-producing and CO2-containing formations, along with other key geologic zones in accordance with applicable regulation. This process of plugging the wells ensures that the fluids in the producing zone remain in that zone and cannot migrate to other zones.”
This is the CO2 process I’m familiar with. What process are you describing?
" CO2 based EOR doesn’t sequester the CO2."
The word "sequestration is used 64 time in OXY’s latest investor presentation.
https://www.oxy.com/investors/stockholder-resources/lcv-inve…
Someone should sue OXY for false advertising.
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This is the CO2 process I’m familiar with. What process are you describing?
The one I described in my post as follows:
“To keep the CO2 down, you must plug the old producing wells if you’re using the reservoir to sequester it. Some reservoirs are candidates, some are not.”
That’s AFTER the EOR is discontinued. Not all reservoirs are candidates because of subsurface connections to other strata.
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You’re wrong, but don’t listen to me or to OXY (after all, what do they know, they’ve been doing it for decades):
Breck,
One point you might be missing is that the CO2 EOR process does basically nothing to address the CO2 that is emitted by the combustion of fossil fuels.
That CO2 used in EOR is sourced from natural reservoirs and piped to the Permian. One could never recover CO2 from fuel sources and afford to use it in EOR. It would be far too expensive.
So all that’s basically happening is to try to recover the CO2 that comes from natural sources and return it to the ground - less that part that’s lost over the years.
In that sense, OXY IS misleading in claiming that EOR is reducing the CO2 that’s of concern in climate change, that emitted from combustion. It’s a bit of greenwashing.
Now OXY does have experience in reinjecting CO2 - as do all the other companies that have employed CO2 EOR. All the majors and many more.
OXY is also attempting to recover CO2 from the atmosphere and reinject it. That would contribute to helping the climate. But so are many other O&G companies - to a greater or lesser extent. This is still in the early stages, and its economic viability remains to be proven.
I know of no competitive advantages OXY would have in this regard. And I’ve worked with people who are leaders in EOR research and application. I once sponsored a research program within my former company to try to develop mobility control agents for CO2 to try to improve contacting with residual oil in the reservoir. That’s one of the major problems with CO2 as an EOR process. Being lighter and less viscous than oil, it tends to override the reservoir and seek the easiest path to the lower pressure producing wells. Once that breakthrough happens the EOR process is finished. That’s why many people alternate CO2 injection and water injection - the WAG process - to try to keep that from happening.
I hope Buffett understands this and isn’t counting on CO2 as any significant kicker to his OXY purchases.
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<<So all that’s basically happening is to try to recover the CO2 that comes from natural sources and return it to the ground - less that part that’s lost over the years.
Is CO2 from natural sources in solid form? Otherwise, it would still go to the atmosphere as pollution.
"“To keep the CO2 down, you must plug the old producing wells if you’re using the reservoir to sequester it. Some reservoirs are candidates, some are not.”
That’s AFTER the EOR is discontinued.
No disrespect, but you’re wrong again. A significant portion of the CO2 becomes trapped in the reservoir DURING the enhanced oil recovery process.
CO2 becomes trapped permanently in the reservoir during the EOR process in three ways:
- CO2 entrapment in the pore space of the rock(CO2 EOR is partially a displacement process).
- CO2 dissolves in residual formation water, which which stays trapped in the ground.
- Mineralization of the CO2 in the rock pore space CO2
https://www.frontiersin.org/articles/10.3389/fenrg.2017.0001…
Believe me, if the CO2 was 100% recycled, OXY’s EOR expense would not be 40% of their OPEX. They keep having to buy more to replace the CO2 that’s “lost” in the ground.
Here’s a short video describing the process (start at 1:50 min if in a hurry) :
https://www.youtube.com/watch?v=GOdkvBW7L24
Have no clue whether this has anything to do with Berkshire buying the shares, just throwing it out as a possibility. The “ESG” train is accelerating, whether it will ultimately have any positive impact on the environment or not (like Charlie, I’m skeptical).
Instead of arm waving, OXY is offering the world a viable, proven and measurable option for CO2 emission (and possibly atmospheric level) reduction.
I think we’ve beat this one to death.
Again, no disrespect. I value your contributions to the board.
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