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Warren Buffett’s Occidental Petroleum Pick Suddenly Makes Even More Sense

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Berkshire Hathaway‘s (NYSE: BRK.A) (NYSE: BRK.B) 2022 re-entry into a position in oil giant Occidental Petroleum (NYSE: OXY) wasn’t exactly expected. But investors didn’t balk, either. Warren Buffett’s owned plenty of energy stocks in the past, after all, and there’s no denying the world remains dependent on crude oil.

Buffett and his acolytes’ decision to reopen an Occidental Petroleum trade — and add to it in the meantime — is looking increasingly brilliant. Demand for oil continues to grow despite the advent of alternative energy sources, and the global supply of crude is facing a potential crunch that could keep oil prices elevated into the distant future.

That’s the take from Occidental CEO Vicki Hollub, and she would arguably know as well as anyone could.Her company also stands to greatly benefit from this brewing supply/demand dynamic.

The world really is running out of gas

This doesn’t quite seem to be the case right now. Crude oil prices are down from a mid-2022 peak near $120 per barrel to roughly $73 per barrel, still trading within sight of new multiyear lows. War in Ukraine and now unrest in the Middle East (and in the Red Sea and Mediterranean Sea in particular) hasn’t proven nearly as disruptive as initially feared.

NKE Inventories (Quarterly) Chart

Just wait, though. A day of reckoning is coming.

Hollub most recently voiced her concern in an interview with CNBC’s Tyler Mathisen, explaining that known crude reserves are being found and developed at a much slower pace than they’ve been in the past. Specifically, she said the world has only newly identified less than half the amount of crude it’s consumed over the course of the past 10 years. Given the current trends, this means demand will exceed supply before the end of 2025.

Were it the only time she’s shared this outlook it might be dismissible — but it’s not the only time she’s done so. Speaking at the World Economic Forum’s annual meeting held in Davos, Switzerland last month, Hollub also expressed concern that a lack of exploration in recent years has set the stage for a supply strain, in turn setting the stage for sustained crude oil prices of between $80 and $85 per barrel come 2025.

She’s not alone in her concern. Late last year, JPMorgan Chase published research suggesting the same. JPMorgan’s global head of energy strategy Christyan Malek said, “We are turning bullish now as we envisage an emerging supply demand gap beyond 2025, coupled with strengthening bottom-up sector fundamentals.” The investment bank further fears, however, the gap between supply and demand will only continue widening through 2030 without new investments in exploration and development. Its long-term price outlook also estimates oil prices above $80 per barrel for a long, long while.

Research outfit Wood Mackenzie seems to agree, arguing early last year that “known fields alone cannot meet oil and gas demand to 2050,” requiring serious upstream investments in the meantime.

And no, renewable energy alternatives can’t make up the difference. The United States Energy Information Agency says less than 10% of the nation’s energy production comes from renewable sources, mirroring most of the rest of the developed world. There’s just not enough time to build more green-energy production capacity to make up for the oil and gas that’s soon going to be decreasingly available and considerably more expensive.

All of a sudden, many of Occidental Petroleum’s recent and not-so-recent decisions to invest in more supply and output make even more sense.

Occidental Petroleum is preparing for the future

Take its plans to acquire CrownRock as an example. The $12 billion deal will plug Occidental into a Permian Basin property that’s not only producing, but already generating free cash flow. Better still, the 94,000-acre property offers on the order of 1,700 yet-to-be-developed spots that could be drilled in the future.

That acquisition isn’t nearly as big as 2019’s $55 billion purchase of Anadarko Petroleum, however, which brought several different active wells into the fold. Some of them have since been divested. Others haven’t, if they were a good strategic fit. Like the deal to buy CrownRock, the Anadarko acquisition ultimately positions the parent company to make the most of an opportunity few saw coming five years back…when crude oil prices were struggling just to hold above $60 per barrel.

The company has also made significant investments in enhanced oil recovery technology that uses carbon dioxide (CO2) gas to extract more crude from an existing well. In 2022 it inked deals with EnLink Midstream, Enterprise Products Partners, and Natural Resource Partners to establish an effective means of sourcing and using industrial CO2, which not only improves well extraction by 10% to 25%, but does so with lower greenhouse gas emissions than alternative approaches produce.

In this vein, Occidental Petroleum’s top brass isn’t unaware the energy environment is changing — even if sweeping change remains many years down the road. In November the company announced a $550 million investment from BlackRock in Occidental’s direct air capture (DAC) facility in Ector County, Texas. Called STRATOS, once completed this project will be the world’s largest direct air capture facility, capable of removing up to 500,000 tons of carbon dioxide out of the air every year. Not only can this CO2 be used to help the company produce more oil, but it may even be possible to use this simple gas as a means of synthesizing environmentally friendly jet fuel.

Such solutions are not yet mandated. New laws aimed at protecting the environment are increasingly common, though. Occidental Petroleum is prepared for whatever the future may hold.

Bet on the company that saw it coming from a mile away

Occidental Petroleum isn’t the only way to play the impending oil shortage, of course. Buffett’s Berkshire Hathaway holds a sizable stake in Chevron (NYSE: CVX) too, which will also benefit from crude’s global supply reaching an important tipping point in 2025.

If there’s room in your portfolio for only one or two of Warren Buffett’s current energy holdings, Occidental is a strong candidate. Hollub appears to have a firm grasp on the current supply/demand situation and is likely better preparing for the future than rivals not taking the matter quite as seriously.

Should you invest $1,000 in Occidental Petroleum right now?

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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Chevron, and JPMorgan Chase. The Motley Fool recommends Enterprise Products Partners and Occidental Petroleum. The Motley Fool has a disclosure policy.

Warren Buffett’s Occidental Petroleum Pick Suddenly Makes Even More Sense was originally published by The Motley Fool

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