Warren Buffett has been making a huge wager on oil prices. His company, Berkshire Hathaway (BRK.A 0.30%) (BRK.B 0.52%), has purchased millions of shares of oil giants Chevron (CVX -1.80%) and Occidental Petroleum (OXY -1.99%). He now owns sizable positions in both companies, positioning his portfolio to capitalize on higher oil prices.
That thesis recently got a potential boost from OPEC. The group of oil-producing nations led by Saudi Arabia recently agreed to cut its production by 100,000 barrels per day (BPD). They’re reducing output to boost prices, which have cooled off because of concerns that the global economy is slowing. Higher prices could give oil stocks — including those owned by Buffett — the fuel to head higher.
Drilling down on OPEC’s role in the oil market
OPEC has long held significant sway over the oil market. The 13-member group of oil-producing nations sets production quotas to keep a firm grasp on oil supplies. The group has also started coordinating with several non-member countries, including Russia and known as OPEC+, to have even more sway over oil prices.
This expanded group recently agreed to cut its collective October production target by 100,000 BPD. While that’s a relatively small amount at about 0.1% of global demand, it signals that the group intends to support oil prices, which have fallen from over $120 a barrel in June to around $90 a barrel on macroeconomic concerns.
It comes at a time when there’s the potential for more supply issues. Equipment, personnel, and supply shortages in the U.S. could cause the country’s production to fall short of estimates this year. Meanwhile, some oil analysts believe the market isn’t pricing in the potential impact of persistent supply deficits elsewhere. These factors lead some analysts to forecast crude prices will rebound into the $120s in the coming months as supplies could trail demand.
Positioning for the potential rebound
Berkshire Hathaway is taking steps to capitalize on the prospect of higher crude prices. Buffett’s company bought another 2.4 million shares of Chevron in the second quarter. That boosted its position to 161.4 million shares or 8.4% of its total outstanding shares. That stake is now worth over $25 billion.
Buffett’s company also increased its stake in Occidental. Berkshire purchased another 22 million shares in the second quarter and now holds over 188 million shares. That’s more than 20% of the company’s outstanding stock. It recently received regulatory approval to acquire up to half of the oil giant’s outstanding shares.
The oil giants have been cashing in on higher crude prices this year. In the second quarter, Occidental produced a record $4.2 billion of free cash flow. The company captured an average of $107.72 per barrel of oil sold in the quarter, up 17% from the first quarter. That enabled Occidental to surpass its near-term debt reduction goal and start returning more cash to shareholders by activating its share repurchase program. While free cash flow likely won’t be as high in the third quarter because oil prices have cooled down, it would surge if they rebounded. That would give Occidental more cash to repay debt and return money to shareholders, giving its stock more fuel to continue rallying. This year, shares are already up triple digits on higher oil prices and Buffett’s buying.
Chevron has also capitalized on higher oil prices this year. It has generated $22.2 billion of operating cash flow through the first six months, almost double the $12.2 billion it produced in the same period of 2021. That has enabled the oil giant to increase its dividend, invest in traditional and new energy sources, strengthen its already top-tier balance sheet, and repurchase stock. OPEC’s move to bolster crude prices would enable Chevron to generate more cash that it can allocate to create additional value for its shareholders. That could further boost Chevron’s stock price, which has already surged more than 35% on the year.
More fuel for Buffett’s oil stocks
OPEC is taking action to prop up oil prices after their recent slide to $90 a barrel. That move bodes well for Buffett’s oil stock investments as higher oil prices would enable Occidental and Chevron to produce more cash to create additional value for shareholders. It gives investors already bullish on oil prices another reason to remain optimistic they could head back into the triple digits and give oil stocks the fuel to continue surging.
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.