富途研究

wrote a column · ·

Futu Research | Buffett is optimistic about Occidental Petroleum, what is the investment value?

Buffett's investment in Occidental Petroleum began with a fierce merger and acquisition battle in 2019. When Occidental Petroleum CEO Vicki Hollob faced Chevron's competitive offer of 33 billion dollars, she resolutely rushed to Omaha to seek support from “stock god” Buffett. Buffett saw the business opportunity and generously contributed 10 billion dollars to help Occidental Petroleum counterattack the acquisition of Anadarco with 38 billion dollars. Behind this strategic move, Berkshire not only received high returns — 10 billion dollar preferred shares with an 8% fixed dividend, but also held warrants to buy 80 million shares of common stock, thus kicking off Buffett's investment in Occidental Petroleum.

Since Futu Research focuses on finding profitable opportunities, this article will explore the current investment value of Occidental Petroleum from two aspects, namely:

1. Buffett's logic of investing in Occidental Petroleum;

2. Occidental Petroleum's current financial status, valuation and investment opportunities;

I. Buffett's logic of investing in Occidental Petroleum

Occidental Petroleum mentioned in the full text of Buffett's letter to shareholders. We are also quoting the original text, which is also very classic. Let's break down the logic that Buffett invests in Occidental Petroleum separately:

1. Although we really like our ownership and options, Berkshire has no intention of acquiring or managing Occidental Petroleum. We are particularly optimistic about Occidental Petroleum's significant oil and gas assets in the US and its leading position in carbon capture, although the economic viability of this technology has yet to be verified. Both activities are very much in our national interest. Not long ago, the US was also heavily dependent on foreign oil, and carbon capture technology had no significant supporters.

Logic 1: Sufficient oil and gas reserves+advanced carbon capture technology;

2. In fact, in 1975, US oil production was 8 million barrels of oil equivalent per day (“BOEPD”), which far fell short of the country's needs. America's energy situation provided favorable conditions for American mobilization during World War II, but now America's energy situation has deteriorated and it has become heavily dependent on potentially unstable foreign suppliers. According to forecasts, oil production is likely to decline further, along with an increase in oil usage in the future.

Logic 2: Long-term supply and demand for oil are tight;

3. For a long period of time, this pessimism seemed correct. By 2007, production had dropped to 5 million b/d. Meanwhile, the US government established the Strategic Petroleum Reserve (“SPR”) in 1975 to mitigate the erosion of America's self-sufficiency, although this problem cannot be completely eliminated.

Then, Hallelujah! The shale economy became viable in 2011, and our dependence on energy came to an end. Now that US oil production has exceeded 13 million b/d, OPEC no longer has the upper hand. Occidental Petroleum's annual oil production in the US is close to SPR's entire inventory every year. If US domestic oil production remains at the level of 5 million barrels per day and relies heavily on non-US oil sources, then our country's resources will now be very, very tight. Judging from this level, if foreign oil supplies are unavailable, the SPR will be emptied within a few months.

Logic 3: Breakthrough in shale oil technology;

4. Under the leadership of Vicki Hollub (Occidental Petroleum President and CEO), Occidental Petroleum is doing the right thing for the US and shareholders.No one knows how oil prices will change in the next month, year, or decade. But Vicki does know how to separate oil from rock, an extraordinary talent that is valuable to both her shareholders and her country.

Logic 4: Vicki has strong professional abilities;

Combining Buffett's statement above, the logical focus of Buffett's investment in Occidental Petroleum is

Company level: sufficient oil and gas reserves+advanced carbon capture technology+reliable management

Industry side: long-term supply and demand tension for oil+technological breakthroughs;

Macro aspect: The US will rely more on local energy production to ensure safety;

So, overall, Buffett's investment in Occidental Petroleum is optimistic about the long-term value of Occidental Petroleum, so let's look at the current financial split of Occidental Petroleum.

II. Occidental Petroleum's current financial status and valuation

We continue to follow Buffett's mentality and see whether this investment is worth buying this company. Currently, the total market value of Occidental Petroleum is 53.183 billion US dollars, so let's first take a look at the assets on the account:

In terms of assets

Monetization portion:

1. Occidental Petroleum currently has about 1.426 billion US dollars in cash accounts;

2. Accounts receivable are about 3.195 billion US dollars. However, in 2023, Occidental Petroleum's accounts receivable were securitized (packaged and sold) to generate a cash payment of 0.9 billion yuan;

3. Inventory is about 2.222 billion US dollars, and I'm not worried about selling these;

4. Other current assets USD 1.732 billion;

Overall, the amount of realizable assets is $8.375 billion.

Assets that are difficult to monetize:

1. Oil and gas reserves are about 109.214 billion US dollars, which is Occidental Petroleum's most valuable asset;

2. Chemical reserves of 8.27 billion yuan;

3. Investment and advance payment of about 3.224 billion yuan;

So when Buffett bought Occidental Petroleum, the most valuable were these resource reserves, which were almost 1092.14+82.7 = 117.484 billion yuan

We can see from the information disclosed in the annual report that Occidental Petroleum's assets in the US are as follows:

Figure: Asset situation in the US

Source: Company announcements, compiled by Futu Securities

1. Permian Basin

The region covers western Texas and southeastern New Mexico. It is one of the largest and most active oil basins in the United States, accounting for more than 45% of total US oil production in 2023;

2. Rockies and Other Domestic

(1) Has more than 0.3 million acres of net land rights in the Powder River Basin, mainly located in Converse County and Campbell County, Wyoming. The oil field contains the Turner, Neobrara, Mori, and Parkman strata and contains liquid and natural gas.

(2) Occidental Petroleum has about 4.6 million acres of net land in other regions of the country, including land and mineral resources outside Occidental Petroleum's core business area, including parts of Arkansas, Colorado, Louisiana, Texas, West Virginia, and Wyoming;

(3) The total net area of the DJ basin (including the North DJ basin) is about 0.7 million acres. Through Occidental Petroleum's continuous area location and royalty increases, it provides competitive economic benefits, lower break-even costs, and free cash flow generation;

3. Gulf of Mexico assets among offshore domestic assets

The fourth largest oil and gas producer, operates 10 strategically located deep-water floating platforms, the largest number of any deep-water operator. It produces in 18 active oil fields and has operating interests spanning 261 blocks, with a net area of about 0.9 million acres.

Figure: Gulf of Mexico Assets

Source: Company announcements, compiled by Futu Securities

Occidental Petroleum's assets outside the US are:

Figure: The state of assets in and outside the US

Source: Company announcements, compiled by Futu Securities

1. Middle East/North Africa Assets

(1) Algeria

Development and production rights for 18 oil fields within blocks 404a and 208. These fields are located in the Berkine basin in the Sahara Desert in Algeria and are governed by agreements between Occidental Petroleum, Sonatrach, and other partners. Western companies bear 35% of development and production costs. The El Merk central processing facility in block 208 processes produced oil, liquefied natural gas, and natural gas, while the Hassi Berkine South and Ourhoud central processing facilities in block 404a handle the oil produced. Under the new development agreement, production rights for the 404a block and 208 block oil fields came into effect on May 3, 2023, and will continue until 2048.

(2) Oman

Occidental is the operator of block 9, block 27, block 53 (Mukhaizna oil field), block 62, and block 65, and has additional interests in blocks 30, 51, and 72, which are in the exploration phase. The mining rights and contract expiration years for each block are shown in the table below. Occidental Petroleum owns 6 million acres of land and has 10,000 potential oil well inventory locations. Occidental Petroleum's share of production was 66 Mboe/d in 2023.

Figure: Resource situation in Oman

Source: Company announcements, compiled by Futu Securities

(3) Qatar

In partnership with the Dolphin Energy Project, the project consists of two separate economic interests. Occidental Petroleum has a 24.5% interest in the upstream business to develop and produce liquefied natural gas, natural gas, and condensate from Qatar's North Oilfield by mid-2032. Occidental Petroleum also has a 24.5% interest in DEL, which operates a pipeline and is further discussed in the midstream and marketing departments section under the 10-K pipeline in this table. In 2023, Occidental Oil's net share of Dolphin production was 39 MBoe/d.

(4) United Arab Emirates

Partnering with Abu Dhabi National Petroleum Corporation, it owns 40% of the participation interest in the Shah gas field (Al Hosn Gas), which expires in 2041. In 2023, Occidental Petroleum's net share of Al Hosn Gas production was 267 mmCF/d natural gas and 38 MbBL/d of NGL and condensate.

Looking at the daily oil and gas production in 2023:

(1) The 2023 production structure is 52% oil, 23% is NGL, and 25% is natural gas；

(2) Production is about 1.22 million barrels per day, of which 0.22 million barrels of oil and gas are produced in non-US production areas, and the daily production of 1 million barrels of oil and gas liquid is in the US (of which oil 0.534 million barrels per day, NGL 0.248 million barrels per day, natural gas 0.218 million barrels per day);

As a result, Occidental Petroleum's current assets are widely and intricately distributed in many countries, but the United States as a whole is the main asset.

From a security perspective, Buffett's investment in Occidental Petroleum is certainly a very safe asset from the perspective of US national security:

After breaking up the assets section, we then split up the liabilities section and found that the overall debt was 43.659 billion yuan, of which the payables and receivables were similar in size, mainly:

1. The size of short-term loans and lease liabilities is approximately 1.648 billion yuan;

2. Long-term loans and lease liabilities are approximately 19.263 billion yuan;

Occidental Petroleum's overall free cash flow was high in 2022, about 12.213 billion US dollars, and in 2023 it was 6.038 billion US dollars. The worst period was when oil prices plummeted in 2020, which was about 1.42 billion US dollars.

According to Buffett's logic, if oil prices stabilize at current levels, if Occidental Petroleum uses free cash flow to repay debts, Occidental Petroleum can be settled after 3-4 years, but what oil companies value more is the amount of reserves.

As can be seen from the 2023 annual report, the annual production in the past three years is about 0.43 billion barrels/year, and its proven (and huge unproven) reserves are almost enough for 9-10 years. If the cash flow generated from current crude oil prices is used, the cash flow generated over a period of about 10 years can buy proven reserves of Occidental Petroleum, and at the same time, there is also a batch of unproven reserves as a return on future investments.

Figure: Reserve and Consumption

Source: Company announcements, compiled by Futu Securities

At the 2023 Berkshire Hathaway Shareholders' Meeting at the 2023 Berkshire Shareholders' Meeting, Buffett said, “We really like Occidental Petroleum's resources, industry position and technical level in the Permian Basin. It has many high-quality oil wells and has done many beneficial things. It's a completely different oil business.

Will Berkshire hold Occidental Petroleum and Chevron for a long time?

Munger: Owning these two companies is equivalent to owning the oil and gas resources of the Permian Basin (Permian Basin).

According to a report released by the US Geological Survey in November 2016, a huge oil field was discovered in Wolfcamp (Wolfcamp) in the Permian basin. Crude oil reserves are estimated at 20 billion barrels. In addition, it also has 16 trillion cubic feet of natural gas and 1.6 billion barrels of liquefied petroleum gas resources. Occidental Petroleum, on the other hand, is the largest oil and gas owner in the Permian basin.

Therefore, our comprehensive judgment is that when investing in Occidental Petroleum at current oil prices, the currently proven reserves are sufficient to recoup the investment costs. The reserve resources of the Permian Basin alone are enough to buy several entire Occidental Petroleum companies.

Therefore, for Western petroleum's investment strategy, due to huge changes in oil prices, we can make the following investment strategy assumptions:

1. If oil prices fall rapidly and it is predicted that future oil prices can be recovered, you can boldly invest in Western Petroleum; conversely, if oil prices cannot be recovered, there is a risk;

2. If oil prices can be maintained at the current position, investing in Western petroleum can also fully recover the investment costs;

3. If oil prices rise steadily, holding Occidental Petroleum is a very stable and rich return;

We can see from the first section of Buffett's judgment, combined with Munger's judgment, that Buffett estimates that the third point will appear, which is why he will hold Occidental Petroleum for a long time.

Based on our comprehensive judgment, we have come to the conclusion that investing in Western oil is likely to continue to make money if oil prices do not fall for a long time.

$Occidental Petroleum (OXY.US)$$Berkshire Hathaway-B (BRK.B.US)$

135K Views