Why Big Investors Are Doubling Down on Oil & Gas Stocks Right Now
In a significant move, Berkshire Hathaway has deployed $434.8 million into Occidental Petroleum through June 17, 2024, reinforcing its already substantial position. Renowned investors like David Tepper and Carlos Slim are also making considerable investments in major energy companies. Last year, Warren Buffett initiated a $4.1 billion stake in Chevron, marking a strategic shift towards the energy sector.
For decades, Warren Buffett, Chairman and CEO of Berkshire Hathaway, favored a conservative investment approach, primarily targeting retail and banking stocks while steering clear of more volatile sectors like energy and tech. Buffett has long considered big American banks a crucial part of the American infrastructure. However, adhering to his mantra of buying when the market is fearful and selling when it gets greedy, Buffett shifted his investment strategy around 2020, significantly reducing his banking holdings in favor of energy stocks when the sector was out of favor on Wall Street.
Last year, Buffett’s $4.1 billion investment in Chevron Inc. (NYSE) secured a nearly 2.5% stake in the oil giant, making it Berkshire Hathaway’s 10th largest equity holding. Buffett continues to strengthen his position in the energy sector, recently committing $434.8 million to Occidental Petroleum (NYSE), one of the world’s largest oil and gas producers. Occidental operates in the U.S., particularly in the Permian Basin, as well as the Middle East and North Africa. The company is also involved in midstream transport and chemical production, and owns Oxy Low Carbon Ventures, a burgeoning carbon capture business.
Occidental has significantly reduced the debt it incurred after acquiring Anadarko in 2019, now maintaining a reasonable leverage ratio of 2.1 times debt to EBITDA and generating $2 billion in operating cash flow. The company also offers a 1.4% dividend yield.
Energy analyst Ben Cook, who manages the Hennessy Energy Transition Fund (HNRGX) and Hennessy Midstream Investor (HMSFX), noted that Occidental is a substantial and liquid investment, ideal for playing the U.S. oil market. He highlighted the deleveraging effect due to higher oil prices and the attractive valuations of energy stocks following recent pullbacks. According to Cook, West Texas Intermediate (WTI) oil prices are expected to remain in the $80-$85 range for the foreseeable future, a favorable price point for most energy producers. Cook also mentioned that the AI boom is likely to make investors more bullish on energy stocks, as the increased electricity demand will necessitate expansion in all forms of energy.
In 2020, Berkshire Hathaway further expanded its energy portfolio by acquiring Dominion Energy Inc.’s natural gas transmission and storage assets for $4 billion in cash and assuming $5.7 billion in debt. This acquisition increased Berkshire’s share of the U.S. interstate natural gas transmission market to 18%, up from 8%.
Berkshire Hathaway isn’t the only entity doubling down on energy stocks. David Tepper has made significant investments in Occidental Petroleum, Energy Transfer LP (NYSE), and PG&E Corporation (NYSE), worth over $800 million combined. Carlos Slim’s Empresarial de Capitales has invested $75.5 million into PBF Energy (NYSE), bringing his total investment in the stock to $150 million since January. PBF Energy, one of the largest independent energy refiners in the U.S., has six refineries and a network of pipelines and storage facilities. The company has improved its balance sheet by paying down debt and addressing environmental liabilities, currently holding $1.4 billion in cash against $1.2 billion of debt. This strong cash position allows PBF to enhance shareholder returns through share buybacks and dividends, with PBF shares offering a 2.3% dividend yield.
Why This Matters for Investors in Direct Participation Projects
For experienced investors considering direct participation projects with major oil operators, this wave of investments by prominent figures like Buffett, Tepper, and Slim is highly significant. It indicates a strong vote of confidence in the future of the oil and gas sector. Direct participation projects, which involve directly investing in the operational activities of oil and gas production, can benefit from the stability and potential returns highlighted by these major investments. As these industry leaders pour significant capital into energy stocks, they are essentially betting on sustained or rising oil prices and robust financial performance within the sector. This trend suggests a favorable environment for direct participation investments, offering potential for substantial returns driven by increased operational efficiency, reduced debt, and enhanced shareholder value in the oil and gas industry.