Is Occidental the Megadeal Warren Buffett’s Been Waiting For?
His recent investment in the rebounding oil producer has investors wondering whether this becomes the next—and potentially biggest—acquisition for cash-rich Berkshire Hathaway.
After swooping in to help shale producer Occidental Petroleum Corp. win a bidding war for Anadarko Petroleum by buying $10 billion of Oxy’s preferred stock in 2019 and then quietly buying up a sizable stake in its regular shares in the months that followed, Warren Buffett’s Berkshire Hathaway Inc. suddenly disappeared from the common stock in 2020, giving no reason for the storied investor’s about-face.
Now, Buffett is once again on the Occidental bandwagon—and with more momentum than ever. Just as billionaire investor Carl Icahn exited his own stake in Occidental, Berkshire disclosed in a regulatory filing in March a rekindled intereSt that’s led to a buying spree”
The article notes: that a deal would likely cost $50B, Berk’s largest deal ever. That OXY is a capital intensive cash producing asset with high barriers to entry. That OXY needs oil at $40bbl to protect its recently hiked dividend. That Buffett and CEO Hollub go back a ways, to when Buffett bankrolled OXY preferred which allowed OXY to prevail in a bidding war against Chevron for Anadarko. And finally that this is a playbook Warren has used before: sidling up to a company as a friendly, taking a decent sized bite, and eventually bringing it under the umbrella (think: railroad).
More at the link.
I suppose it is possible that Buffett wants to buy OXY.
But I think it’s more likely that he wants to get above the 20% ownership where the lower tax on dividends kick in. As Jim Sloan pointed out in a recent Seeking Alpha article:
By turning his warrants into common shares Buffett would be very close to owning 20% of OXY which is the ownership threshold at which the dividend reduction rate of 65% kicks in. Dividends from OXY would then be taxed at a minimal 7% rate - the same situation Berkshire enjoys with Kraft Heinz (KHC).
As for Bloomberg’s claim of “high barriers to entry” in the oil business as an incentive, that makes no sense to me. High barriers to entry are usually important to limit competition - and thus permit “friendly” pricing. OXY, nor any other O&G company, has no control of oil pricing. They are all price takers. XOM, the largest price company, has maybe 4% of world production. OXY would be well under 1%. The whole industry is intensely competitive - and Saudi continues to be the controlling factor in oil prices.
Buffett usually avoids cyclic industries with high capital intensity. BASF and BHE are both high capital intensity, but they are also mostly regulated - hence an acceptable return on capital is guaranteed. That doesn’t exist for O&G producers.
My take is that Buffett sees OXY as a special case with a good medium outlook based on the current supply/demand problems in O&G. These will take some years to correct. He also sees low downside risk once OXY’s debt is greatly reduced. They, and other major Permian producers, can meet dividends at oil prices down to the $40/bbl range. And he can always sell once the preferred shares are ultimately redeemed if he wishes.
So a good dividend play, especially with the tax break, that beats holding cash. But it would be an untypical business for him to purchase entirely.
I would hope for a better elephant.
XOM, the largest price company
The largest Private company. Damn the auto complete function. My apology for not catching it.
Continuing the “My Bad” streak, when I described XOM as being “private”, I was thinking in terms of not being a state owned/controlled company like Saudi, Iran, Kuwait, or - in fact - Russia.
I should have chosen publicly owned.
So, I’ll stop and go get my second booster - a shot in the arm instead of shooting myself in the foot.