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Billionaire Buffett backs up the truck with 12M more Occidental Petroleum shares

Jul. 07, 2022 6:51 PM ET
Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) disclosed it purchased an additional 12 million Occidental Petroleum (NYSE:OXY) shares this week as the billionaire adds to his sizeable stake in the oil giant.

Buffett purchased the 12 million shares for about $700 million at average price of $58.11 on Tuesday and Wednesday and now owns a total of 175 million shares, giving Berkshire a stake of about 18.6%, according to a filing. Berkshire paid in the range of $57 to $59 for the shares.

The latest purchase comes after Buffett spent almost $630 million last week adding to his stake in the oil producer, disclosing late last week that he had purchased 9.9 million shares. Berkshire (BRK.A) (NYSE:BRK.B) is Occidental’s (OXY) largest individual shareholder with 175 million shares worth about $10.8 billion, based on OXY’s Thursday close at $61.47, with options to buy another 83.9M shares that would bring its stake to about 28%.

Truist analyst Neal Dingmann last month said there’s a “good chance” Buffett eventually will buy the whole company when it achieves investment-grade status and he raised his price target to $93.

In the first quarter, Berkshire (BRK.A) purchased ~$7.0 billion worth of Occidental shares. Buffett noted at the Berkshire annual meeting in early May that he was able to buy 14% of the petroleum refiner over only a two-week period.

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Time for intervention? Who in the board can run such intervention?

Truist analyst Neal Dingmann last month said there’s a “good chance” Buffett eventually will buy the whole company when it achieves investment-grade status and he raised his price target to $93.

This makes no sense whatsoever. Why would Buffett wait for investment-grade status and pay a much higher price later. Buffett is not an income fund manager with a mandate to buy investment grade securities. He could easily refinance OXY debt at investment grade interest rstes after purchasing the company.

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…purchased an additional 12 million Occidental Petroleum shares this week…for about $700 million…

$700m in a week…not that far from the rate at which cash stacks up, which is what, on the order of $500m a week?
At the scale of Berkshire, that counts as nibbling. A snack, not a feast.

After the first big dollop, it seems more in keeping with my “blowing off steam” metaphor than diving in with both fists.
https://discussion.fool.com/with-buybacks-accelerating-and-no-ta…

Jim

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Maybe Buffett should have a chat with Ron Olson. There are stocks even more attractive than OXY.

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$700m in a week…not that far from the rate at which cash stacks up, which is what, on the order of $500m a week?
At the scale of Berkshire, that counts as nibbling. A snack, not a feast.

$700 million in two days of trading. A bit more aggressive than $700m per week.

$59.5/share was the cap on those two days’ purchases. No shares purchased on Wednesday.

https://www.sec.gov/Archives/edgar/data/797468/0000899243220…

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Buffett purchased the 12 million shares for about $700 million at average price of $58.11 on Tuesday and Wednesday and now owns a total of 175 million shares, giving Berkshire a stake of about 18.6%, according to a filing. Berkshire paid in the range of $57 to $59 for the shares.

The latest purchase comes after Buffett spent almost $630 million last week adding to his stake in the oil producer, disclosing late last week that he had purchased 9.9 million shares. Berkshire (BRK.A) (NYSE:BRK.B) is Occidental’s (OXY) largest individual shareholder with 175 million shares worth about $10.8 billion, based on OXY’s Thursday close at $61.47, with options to buy another 83.9M shares that would bring its stake to about 28%.

Notice there is a math error in this 28% number and the reasoning behind it.

Berkshire now has 175.4m shares, out of 937.2m outstanding, which is indeed 18.6%. And Berkshire can exercise its $5b in warrants to buy another 83.9m shares. But those shares would be issued by the company, not purchased from other shareholders, and this would increase the number of shares outstanding (while providing $5b in cash for Occidental.)

So Berkshire would then own (175.4m+83.9m)/(937.2+83.9)=25.4% of the company, not (175.4m+83.9m)/937.2=27.7%?28%.

We are maybe days away from hitting the magic 20% level, and then we will see if he stops or not. One further thought on this: if he were to offer to buy the whole company now at, say, $75 a share, that would cost 75*(937.2m-175.4m)=$57.1b. What about the warrants? I presume they would still work, but unless I’m missing something in the reasoning, it would be pointless to exercise the warrants, effectively buying shares from one’s own company in return for one’s own money. It would seem that the small intrinsic value and the larger time value of these options would be lost. Might it not be better to wait, in that case? Under the hypothesis that Buffett wants to buy out Occidental, is there another strategy that would make sense for the owner of these warrants?

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$700 million in two days of trading. A bit more aggressive than $700m per week.

It was reported as the week, implying the total for the week.

But mainly my comment is just to do with the rate through time, not the liquidity or concentration of the buys.
They’ve averaged maybe $31m per calendar day in purchases in the last two months.
I think the cash rolls in at over twice that rate.
Faster in just the last couple of weeks, presumably because the price has been lower, but still not really enough to eat into the cash pile.

Jim

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if he were to offer to buy the whole company now at, say, $75 a share, that would cost 75*(937.2m-
175.4m)=$57.1b. What about the warrants? I presume they would still work, but unless I’m missing
something in the reasoning, it would be pointless to exercise the warrants, effectively buying shares
from one’s own company in return for one’s own money.

It would be pointless after buying the outstanding shares at $75.
But it might not be pointless beforehand or at the same time.

One might speculate that exercising the warrants would (should?) drive down the value of the continuing
shares because of the dilutive effect, as in the case of such a buyout the market thinks the share value is greater than the exercise price.
After exercising it might be cheaper to buy the shares not already owned–maybe an offer of $70 instead of $75 would do it, say.
And then of course you get your cash back anyway.

Phrased another way, ignoring the share count details, it’s cheaper to buy the fraction of the
company not already owned at a mix of $59 and $75 than it is to buy it all at $75.
(the math is not nearly that straight forward, but you get the general idea)

I don’t happen to think that Berkshire will buy Occidental.
But it’s just a guess.

Jim

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Phrased another way, ignoring the share count details, it’s cheaper to buy the fraction of the
company not already owned at a mix of $59 and $75 than it is to buy it all at $75.
(the math is not nearly that straight forward, but you get the general idea)

hmm, not really

Say the price is now $62 and say for the sake of the argument that $75 really is the price where management and the non-Berkshire shareholders would accept a deal.

If the warrants are exercised today, we get a whole bunch of new shares at $59.62, 83.9m of them to be precise according to others’ calculations ($5b/83.9=$59.59, so that sounds right.)

Since that exercise price is very close to the current market price, this should not significantly change the value of shares for ongoing shareholders - if anything, it shores up the company’s finances, and signals that Buffett may go ahead with a takeover, possible increasing the share price.

That still leaves 937.2m-175.4m=761.8m shares for Berkshire to buy at $75, and once that’s done, Berkshire will have bought about 175.4 shares at $55-60 and the other 761.8m at $75. Whether the warrants have been exercised or not doesn’t seem to make any difference to what Berkshire ends up paying to buy the whole thing. If Berkshire has exercised the warrants, it has another 83.9m shares, and has spent $5b to get them, but it still owns the same company, plus the $5b in cash spent to buy the shares. The $5b just goes from Berkshire to Occidental and back to Berkshire when it takes over the whole company.

If the fact of exercising the warrants lowers Occidental’s share price, then ok, maybe Buffett can get the deal done at $73 instead of $75, but with the exercise price so close to the current price, I don’t see how it makes any meaningful difference.

If on the other hand, Buffett decides NOT to purchase the company right now, and in 2 years, the share price is $100, then yes, exercising the warrants will dilute non-Berkshire shareholders and would rationally drop the share price. Or if he doesn’t pull the trigger, getting those $100 shares for $59 would be good, too.

My point is that maybe that time value of the warrants is an additional reason (if any is needed) NOT to go ahead with buying the other 80%.

dt

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