Warren Buffett's 91st year marked by a huge focus on Berkshire Hathaway's energy empire

Published Tue, Aug 30 202211:47 AM EDTUpdated Tue, Aug 30 202211:53 AM EDT

Warren Buffett turns 92 on Tuesday, having spent the past year expanding further his Berkshire Hathaway energy empire, making a classic value investor's bet. One of the most substantial moves from "the Oracle of Omaha" lately has been further increasing Berkshire's exposure to the energy sector, which saw the most buying from the conglomerate over the past four quarters. The legendary investor has been laser focused on two names — Chevron and Occidental Petroleum . The former is now Berkshire's fourth biggest equity holding, worth more than $20 billion, while the latter has the potential to have an even bigger footprint. After scooping up Occidental's stock on the open market for the past few months, Buffett has now amassed a 20.2% position, and the billionaire apparently wants more. Earlier this month, Berkshire received regulatory approval to purchase up to 50%, spurring speculation that it may eventually buy all of of Houston-based Oxy. Oil and gas stocks had been one of the least loved corners of the market as prices tumbled, profits collapsed and environmentally conscious ESG investing gained ground, but they also became a fertile field for value stock-picking. Plus, many energy stocks have found themselves with torrents of cash flow since the economy reopened following Covid lockdowns. That's left their dividends amply covered, with the ability to raise payouts and expand share buybacks. Buffett "might have just looked at the valuations for oil and gas stocks as oil prices were rising and concluded that the companies were going to be to generate substantial amount of cash flows to buy back stocks, pay dividends, pay down debt," said James Shanahan, Berkshire analyst at Edward Jones. "All of this just sounds like the perfect Berkshire Hathaway stock." Occidental has been the best-performing stock in the S & P 500 in 2022 as investors followed Buffett's lead, pushing shares higher. The stock is up nearly 160% this year on the back of surging oil prices and gushing profits. Chevron, which pays a 3.5% dividend, has rallied 40% in 2022. Planning for Berkshire's future The significant investment in Occidental, which says it's a leader in clean energy initiatives like "carbon capture," can help Berkshire diversify in the space. Occidental has one the the most aggressive plans for zero emissions in the industry. If Berkshire continues to ramp up its Occidental investments and makes the position a controlling one, it probably reflects the influence of Greg Abel, Buffett's likely successor who has been leading the conglomerate's energy unit Berkshire Hathaway Energy. Berkshire acquired MidAmerican Energy in 1999, and Abel became CEO of MidAmerican Energy in 2008, six years before it was renamed Berkshire Hathaway Energy in 2014. "Greg Abel certainly has a strong track record," said Shanahan. "The stake in Occidental has the potential to be leveraged by Berkshire Hathaway for business opportunities in the future." The Wall Street Journal reported earlier this month that Buffett hasn't informed Occidental of any plans to acquire a controlling stake. Still, many Buffett watchers believe an acquisition isn't off the table. There have been previous deals that started out from passive investments. For example, Berkshire took a significant stake in Burlington Northern Santa Fe before acquiring the Texas-based railroad in 2009. Full circle moment If Buffett pulls off an even bigger deal on Occidental, the Benjamin Graham acolyte will have come "full circle," according to David Kass, a finance professor at the University of Maryland's Robert H. Smith School of Business. In 1942 at the age of 11, Buffett bought his first stock — three shares of Cities Service's preferred. Cities Service was bought by Occidental 40 years later, and Vicki Holub, now Occidental CEO, had worked with Cities Service at the time. Besides the energy investments, Buffett also bought the first half dip in his No.1 stock Apple in the second quarter. He also also agreed to buy insurer Alleghany Corp. for $11.6 billion earlier this year, Buffett's biggest deal since 2016. "It is a testament to how amazingly agile his mind remains," said Bill Stone, chief investment officer of Glenview Trust Company and a Berkshire shareholder.