May 18, 2024

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Motley Fool Issues Rare “All In” Buy Alert
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Warren Buffett has been making a bold bet on oil prices over the past year. His company, Berkshire Hathaway (BRK.A -1.04%) (BRK.B -1.09%), has been buying shares of oil giants Chevron (CVX 1.82%) and Occidental Petroleum (OXY 4.07%) hand over fist to capitalize on the rise in crude prices.  
While oil prices have cooled off on fears that we’re about to enter a global recession, that slump has reversed recently thanks to OPEC. The group of oil-producing nations has surprisingly agreed to cut its production by a whopping 2 million barrels per day, giving crude prices a lift. That should provide a boost to Buffett’s oil stocks in the future. 
Oil prices have been on a wild ride this year. The price for Brent crude, the global benchmark variety, started 2022 below $80 a barrel. It soon spiked to more than $120 a barrel following Russia’s invasion of Ukraine. It remained in the triple digits well into the summer before cooling off on concerns that the global economy was starting to slow. Brent recently bottomed out in the low $80s.
However, it surged above $90 a barrel on rumors that OPEC was about to cut its production. While initial reports suggested the group, along with other nations collectively known as OPEC+, would slash their output by 1 million barrels per day, they have since agreed to an even deeper reduction of 2 million barrels per day. It’s an astonishing development considering that analysts believe the market might not have enough oil supply to meet demand
The cut should at least put a firm floor under oil prices. Meanwhile, it sets crude up to rally sharply if there’s an unexpected supply issue or demand doesn’t cool, as many anticipate in a global recession.
Stable to rising crude prices should be a boon to Buffett’s oil holdings. Berkshire Hathaway has gobbled up more than 163.5 million shares of Chevron, equal to 8.4% of the oil giant’s outstanding shares. That position is worth over $25 billion, making it Buffett’s third-largest stock holding at 8% of his portfolio. 
Meanwhile, Buffett took advantage of a decline in Occidental Petroleum’s stock price last month as oil prices cooled off to buy another 6 million shares. He now holds 20.9% of the company’s outstanding shares. That position is currently worth nearly $13 billion. Buffett has regulatory approval to take that position up to 50% in the future.
Chevron has capitalized on rising crude prices this year. It produced $21.8 billion of cash flow from operations during the first half, nearly double the $11.2 billion it generated during that same period last year. That gave it the funds to boost its investments in traditional and new energy by 50%, increase its dividend for the 35th straight year, raise the top end of its share repurchase range to $15 billion, and pay down additional debt.
Chevron’s cash flow ebbs and flows with oil prices. Because of that, it will likely see a boost from OPEC’s move to bolster crude prices. That would give it more money to allocate toward creating value for shareholders.
Occidental Petroleum is in the same boat. It has cashed in on higher oil prices this year. It generated a record $4.2 billion of free cash in the second quarter alone. That gave it the funds to repay more than $8 billion of debt by May, quickly exceeding its target. This achievement gave Occidental the confidence to significantly increase its dividend and launch a $3 billion share repurchase program while setting an additional $5 billion debt reduction target. 
The oil company is more likely to be able to repay debt and return capital to shareholders at a faster rate now that OPEC is making this surprising move to support oil prices. This catalyst could fuel a continued surge in Occidental’s share price this year.
OPEC has had enough of crude’s recent slide. That’s evident in its surprising decision to slash its output by 2 million barrels per day. This move could drive oil prices higher in the coming months.
That likely rebound should be a boon to Buffett’s oil investments because it will enable Chevron and Occidental Petroleum to generate more cash. They can use those funds to reduce debt and return more money to investors, which should help boost their stock prices. That unexpected intervention makes Buffett’s oil stock bets look like they’ll continue to pay off.  

Matthew DiLallo has positions in Berkshire Hathaway (B shares). The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.
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