Buffett's Occidental Endgame
Occidental Petroleum is not likely to be acquired by Berkshire Hathaway but Warren Buffett is happy to continue buying shares under $60. What's next?
“We will not be making any offer for control of Occidental. But we love the shares we have. And we may or may not own more in the future. But we certainly have warrants, which we got as part of the original deal, on a very sustainable amount of stock, at around $59 a share. And those warrants last a long time. I’m glad we have them.”
Warren Buffett surprised many shareholders at the Berkshire Hathaway annual meeting earlier this month when he said that he will not make an offer for control of Occidental Petroleum. Mr. Buffett expressed confidence in Vicki Hollub, Occidental’s CEO, and the economics of the company’s Permian Basin reserves but he seemed satisfied to play a passive role with a substantial minority interest.
When Berkshire’s stake in the oil company closed in on the 20% milestone in July 2022, I was skeptical that Mr. Buffett would want Occidental to become a wholly owned subsidiary. Among the factors I cited were political risks, flexibility, and Berkshire’s advantageous position due to investments in preferred stock and warrants. However, I left open the possibility of an acquisition since I have been surprised by similar situations in the past, most notably the acquisition of BNSF in 2010.
While Mr. Buffett’s statement during the annual meeting seems definitive, I would say that we can never completely exclude the possibility of an acquisition. While we cannot predict the future with certainty, we can observe what’s happening in the present. Due to Berkshire’s large interest in Occidental, all activity in the stock must be reported to the SEC within two business days following the transaction. This week, Berkshire reported purchasing 5,623,014 shares of Occidental stock for $327.2 million between May 11 and May 18, as shown in the following exhibit:
Berkshire currently owns 217,330,133 shares of Occidental common stock with a cost of $11.66 billion, or $53.66 per share. At the close of trading on May 18, Berkshire’s position was worth $12.66 billion, representing an unrealized gain of $1 billion. Based on Occidental’s latest share count, Berkshire owns 24.4% of the company.
This article takes a look at Berkshire’s overall exposure to Occidental Petroleum including the preferred stock and warrants, Berkshire’s investment in Chevron, and what Warren Buffett’s next move in the oil and gas industry might be.
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