Warren Buffett’s Berkshire Hathaway Adds to Big Oil Bet

The moves bring Berkshire’s total stake in Occidental to 18.7%. Berkshire, which is by far Occidental’s largest shareholder, is now one step closer to reaching a threshold that would allow it to include Occidental in its results—something that could give its earnings a boost.

Generally accepted accounting principles recommend that investors include a proportionate share of a company’s earnings in their own results once they own at least 20% of the company’s common stock. With analysts expecting Occidental to report about $10 billion in earnings this year, Berkshire could increase its reported profit by about $2 billion if it winds up acquiring 20% of Occidental’s shares, according to

David Kass,

a finance professor at the University of Maryland’s

Robert H. Smith

School of Business.

That would be a significant lift for Berkshire. At the moment, the company only includes Occidental’s dividend payments—less than $100 million annually—in its earnings, Mr. Kass said. Last year, Berkshire posted a record profit of about $90 billion.

Berkshire currently applies the so-called equity method of accounting to

Kraft Heinz Co.

, in which it has a 26.6% stake.

Some analysts said it wouldn’t be surprising to see Berkshire continue to boost its investment in Occidental.

It has the funds to do so: Berkshire’s cash pile stood at about $106 billion at the end of the first quarter. And Mr. Buffett has expressed admiration for Occidental Chief Executive

Vicki Hollub,

who has focused on reducing the company’s debt load, as well as returning capital to shareholders through buybacks and dividends.

“What Vicki Hollub was saying made nothing but sense,” Mr. Buffett said at Berkshire’s annual shareholder meeting in April. Occidental looked like “a good place to put Berkshire’s money,” he added.

So far, Berkshire’s bet has paid off.

Occidental has been a standout in the stock market this year, thanks in large part to the surge in oil prices after Russia invaded Ukraine. Its shares have soared 98% in 2022—making it by far the best performer in the S&P 500 this year. By comparison, the second best-performing stock in the index,

Valero Energy Corp.

, has risen 40%, while the broad S&P 500 has shed 20%.

Besides potentially trying to acquire enough of Occidental to include it in its results, Berkshire is doing “what most astute investors would do amid rising energy prices,” increasing its exposure to the energy sector, said

Cathy Seifert,

an analyst who covers Berkshire at CFRA Research.

In addition to Occidental, Berkshire also has plowed money this year into

Chevron Corp.

, which ranked as its fourth-biggest stockholding as of the end of April.

Some analysts believe Berkshire may go even further.

Beyond simply buying more shares, Berkshire has another way it can swiftly boost its stake: exercising its warrants. Berkshire acquired warrants to buy an additional 83.9 million shares of Occidental at $59.62 apiece when it invested $10 billion in the company in 2019 to help fund its acquisition of Anadarko Petroleum. Although Occidental shares are trading below $59.62, they closed above the mark as recently as Friday.

There’s a good chance that Berkshire might try to acquire the rest of Occidental if and when the company’s credit rating improves,

Neal Dingmann,

analyst at Truist Securities, wrote in a June research note.

Berkshire typically owns only investment-grade companies, and Occidental’s credit rating is just below that level. But it will likely improve within the year, given how much it has been focusing on paying down debt and freeing up cash flow, Mr. Dingmann added.

Occidental, which explores for and produces oil and natural gas, would also complement Berkshire’s existing energy businesses, Mr. Dingmann said. Berkshire Hathaway Energy Co. owns utilities, natural-gas companies, and solar and wind power businesses, but nothing focused on oil itself.

Berkshire and Occidental didn’t immediately respond to requests for comment.

Mr. Buffett has spoken favorably about the U.S. oil industry, telling shareholders at Berkshire’s annual meeting that it was beneficial for the country to be able to produce more of its own oil to lessen its need for imports.

“We should be very happy that we can produce 11 million barrels a day, or something of the sort, in the United States, rather than being able to produce none and having to find 11 million barrels a day somewhere else in the world to take care of keeping the American industrial machine working,” he said.

Write to Akane Otani at [email protected]