- Investors shouldn't follow Warren Buffett in his buying spree of Occidental Petroleum, according to Bank of America.
- The bank said there is limited upside in Occidental and that Buffett risks bidding against himself for the stock.
- The bank reminded investors that Buffett has a spotty track record when it comes to investing in oil companies.
Should investors follow Warren Buffett as his Berkshire Hathaway continues to build a stake in Occidental Petroleum? According to Bank of America, the answer is "no."
The bank reiterated its "Neutral" view on Occidental in a Monday note to investors, setting an $80 price target, which represents potential upside of about 12% from current levels.
"If [Buffett's stake in] Occidental Petroleum is a bullish view [on oil prices] there are better options given its limited upside," BofA said.
Buffett already owns more than 20% of the company, has warrants to purchase even more of the stock, and was granted approval last week to purchase up to 50% of the company. While Buffett hasn't expressed intent for a full takeover of the company by Berkshire Hathaway, that can change down the road.
But with limited upside in the stock, Buffett risks bidding against himself for full control of the company, BofA said.
"Berkshire Hathaway's role as the 'rate of change' agent may have been overlooked but their disclosed interest may continue to squeeze short positions, recent outperformance may mean the risk from here is that Berkshire Hathaway ends up bidding against itself," BofA said.
The bank reminded investors that Buffett's oil bets haven't always panned out well, including his purchase of ConocoPhillips right before the 2008 stock market meltdown.
"This would not be the first time Berkshire Hathaway has publicly made a call on oil prices: but its track record has not always worked out so well... We recall a time in the past when Berkshire Hathaway has very publicly taken a sizeable equity position as a tangible demonstration of a directional position on oil prices," BofA said.
In 2008, Berkshire Hathaway built a 5.5% stake in ConocoPhillips before its stock price plummeted amid a crash in oil prices due to an economic slowdown.
Buffett conceded in his annual shareholder letter: "...[L]ast year I made a major mistake... without urging from anyone else, I bought a large amount of ConocoPhillips stock when oil and gras prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred...I still believe the odds are good that oil sells far higher in the future... but so far I have been dead wrong," Buffett said.
"Our point is not to pick on Berkshire Hathaway's misfortunes around energy in 2008: it was certainly not alone. It is simply to point out that just because Berkshire Hathaway has chosen to step into Occidental Petroleum in 2022 does not necessarily imply some proprietary insight that can drive differential market recognition of value," BofA said.
Ultimately, if an investor has the view that oil prices will continue to move higher, there are better oil stocks to invest in to express that view, according to BofA.
"While Berkshire Hathaway will no doubt continue to squeeze an elevated short position, we see better options to play that theme where there is still: rate of change, capacity for outsized cash returns with similar operating leverage and more meaningful value upside. Otherwise at this point, we see the risk for Berkshire that it is at risk of bidding against itself," BofA concluded.