The Buffett Effect of Western Petroleum: More Solid Stock Prices, Lower Volatility

The "Buffett Effect" is vividly reflected in Western Petroleum's energy stocks.

"Under Buffett's blessing, Western Petroleum did not suffer serious stock price declines during the period of falling oil prices, unlike other oil and gas producers." Since August last year, crude oil prices have been below $100 per barrel, corresponding to the poor performance of energy stocks. Energy stocks have become the worst-performing sector in the S&P 500 index so far this year, with a cumulative decline of nearly 8%, while the S&P 500 index has risen by about 12% during the same period. Some energy stocks have fallen by double digits, while Western Petroleum's decline is less than 6%.

Taking Monday as an example, oil prices fell sharply again, with US oil and Brent oil closing down by about 4%, while Western Petroleum's corresponding decline was less than 1%.

"At the same time, Western Petroleum's stock volatility is much lower than that of companies with the same market value, comparable to its peers." The company's 90-day volatility is close to that of ExxonMobil or Chevron, whose market values are 8 and 5 times that of Western Petroleum, respectively.

Analysis suggests that this is a psychological "Buffett effect." Investors believe that since Buffett likes this stock, they should buy it too.

Western Petroleum was the stock that hedge funds bought the most in the first quarter of this year. Cole Smead, CEO of Smead Capital Management, said that Buffett continued to increase his holdings of Western Petroleum at lower oil prices, and expected Western Petroleum's stock price to reach $100. However, Smead did not give a specific time frame for when this could happen. The company holds more than 7 million shares of Western Petroleum's stock.

For most of the past year, Berkshire Hathaway has been buying Western Petroleum's stock on dips, and most of them have added positions when the stock fell below $60. Recent data from late May showed that Buffett continued to increase his holdings of Western Petroleum while the stock price was low, and now holds about 222 million shares of common stock in Western Petroleum, worth about $13 billion, with a stake of 24.9%.

The market generally expects that when Western Petroleum's stock price falls below $60, Buffett will continue to increase his holdings in the company. In August last year, Berkshire Hathaway received regulatory approval to purchase up to 50% of Western Petroleum's shares.

Western Petroleum has been redeeming preferred shares held by Buffett, which other investors see as positive because it can reduce Western Petroleum's costs. In 2019, Western Petroleum acquired Anadarko in the form of preferred shares, with Berkshire Hathaway investing $10 billion at an 8% dividend yield.

However, Wall Street analysts are not so optimistic about Western Petroleum. According to Bloomberg's summary, analysts' average target price for Western Petroleum is $68, about 15% higher than Monday's price of about $59, while they expect the S&P 500 energy index to rise 22% at the current level. 17 analysts gave a hold rating, and 11 analysts gave a buy rating. At the Berkshire Hathaway annual meeting in early May, Buffett said he would not make any tender offer to control Occidental Petroleum. "We will not make any tender offer to control Occidental Petroleum, but we like the stocks we own and are satisfied with our current holdings. We may or may not buy more Occidental Petroleum stocks in the future. We have a large number of warrants for Occidental Petroleum stocks obtained in the original transaction, at about $59 per share, and the warrants have a long duration. I am glad we have them."

Buffett said Berkshire Hathaway likes Occidental Petroleum's resources and industry position in the Permian Basin, which is why they invested in the company. Buffett also said he likes Occidental Petroleum's management team and is familiar with them. Occidental Petroleum has done many good things, built many new wells and is profitable.