By Benoît Morenne

Warren Buffett made a splashy bet on petroleum giant Occidental Petroleum. As he heads for the exit, Berkshire Hathaway appears stuck with a souring investment.

Berkshire entered Occidental's stock in 2022 and has amassed enough shares to own 28% of the company -- and earn largest shareholder status. Buffett's endorsement has been a reputation booster for the company and its chief executive, Vicki Hollub.

But with U.S. oil prices dropping below $60 a barrel, crude producers' valuations have slumped. Occidental last month saw its stock drop to a more than three-year low. While Berkshire has snapped up much of its Occidental stake at prices above $50 a share, the stock closed at $39 on Wednesday. Berkshire has seen the value of its Occidental position drop by about $6.4 billion from its peak last year, according to FactSet.

Now, the prolonged period of pain major U.S. drillers anticipate is set to test Berkshire's faith in Houston-based Occidental.

Investors and analysts are pondering whether Buffett's appointed successor, Greg Abel, will dump some of the stock, avail himself of the falling price to accumulate more shares, or even make an outright bid to acquire the whole firm. Few expect Berkshire to liquidate the position, noting the company is a patient investor that can afford to wait out slumps.

"He looks foolish now," Cole Smead, CEO and portfolio manager at Smead Capital Management, which owns Berkshire and Occidental shares, said of Buffett. "But I don't think he's going to be wrong."

People close to Occidental say the case for owning shares of the oil producer remains strong.

Buffett didn't respond to a request for comment.

Occidental on Wednesday said it planned to reduce spending this year by roughly 3%, in part thanks to efficiencies.

Buffett has raved about the investment, saying at Berkshire's annual meeting last year that "we're in it for keeps." He has described Hollub as an extraordinary manager. To people close to her, Hollub has marveled that she used to play in a marching band in college and now gets to hang out with the famous investor.

In an interview with The Wall Street Journal last year, she said she regularly flies to Omaha, Neb., to visit with Buffett. She said he doesn't want to manage the company but is interested in the technical side of Occidental's oil-and-gas business, and how it creates value.

"He will say things like, 'You know, I may not get this and probably won't understand it, but I want to talk about it, hear about it,'" she recalled.

There are signs that Buffett's enthusiasm might have dampened somewhat. He talked about Occidental during Berkshire's previous three annual meetings, but he didn't mention the company once Saturday at what turned out to be his last such meeting as CEO. Hollub sat in the audience as he spoke.

People close to Occidental say the company expects no material change in Berkshire's position. They note that members of Hollub's operational team tag along when she visits with Buffett, and that they have met Berkshire executives responsible for making long-term investment decisions.

Buffett has invested in oil stocks before, which he has said he regretted. He spent 2008 amassing a sizable stake in ConocoPhillips, only to see it crash when the global recession hit and oil prices sank. Berkshire invested in Exxon Mobil several times over the following years, only to dump the entirety of the stake in 2014 when oil prices fell.

Then came the pandemic and bargain-basement deals for cheap stocks. Berkshire binged on Chevron, of which it currently owns roughly 7% of shares. As economies reopened and oil prices soared, the conglomerate acquired around 10% of Occidental's stock -- and then kept buying.

Buffett was familiar with Occidental. In 2019, when the company found itself in a bidding war with much-larger Chevron for Anadarko Petroleum, Hollub negotiated a pricey loan with Buffett in the form of $10 billion in preferred stock paying 8% annually in dividends, or $800 million.

Buffett has said he decided to invest in Occidental after he heard Hollub detail the company's future plans for analysts: "What Vicki Hollub was saying made nothing but sense." He has said the shale revolution and its gusher of crude has helped keep the American industrial machine working.

His endorsement appeared to embolden Occidental. Buffett has supported its moonshot to pull carbon dioxide out of the air, even as he acknowledged that the technique is economically unproven. Occidental last year splurged to acquire Permian driller CrownRock in a roughly $11 billion cash-and-stock deal that other oil executives described as generous. It pushed Occidental's long-term debt, which last quarter stood at about $24 billion.

Now, Occidental faces new challenges. Many economists anticipate President Trump's tariffs will spark a global slowdown that will reduce demand for oil. Meanwhile, the Organization of the Petroleum Exporting Countries and its allies have decided to pump more oil, further pressuring prices.

David Deckelbaum, an analyst at investment bank TD Cowen, noted that lower oil prices will make it harder for Occidental to reduce its debt levels, which are higher compared with its peers.

"There's certainly a degraded ability to return capital to shareholders in 2025, there's a degraded ability to pay down debt," he said.

One segment where Occidental faces potential headwinds is its low-carbon ventures, which includes its direct-air capture efforts. The Wall Street Journal has reported that the Energy Department is preparing dramatic cuts that could halt nearly $10 billion in federal funding for clean-energy projects, including a partnership with Occidental for carbon capture in South Texas.

Although Occidental's share price is down, some investors say the company remains on a positive trajectory. Its recent acquisitions have beefed up its inventory at a time when rivals face a dearth of good wells. That positions it to benefit if crude prices rebound in the future.

"They just have a lot of oil to go out and produce for a very long time, " said Smead.

Write to Benoît Morenne at benoit.morenne@wsj.com

(END) Dow Jones Newswires

May 08, 2025 05:30 ET (09:30 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.