Stop the presses: STIFEL on BRK-OXY this AM

Stifel: We believe there is good chance billionaire investor Warren Buffett buys the remaining 2/3 of Occidental that he and Berkshire Hathaway (BRK.B, Not Rated) do not own once the company becomes investment grade. Buffett disclosed the purchase of additional Occidental common shares last night resulting in the ownership of ~1/3 of the company (includes pref ownership) with the investor’s current energy company owning mostly IG companies. - Neal Dingmann

perhaps WEB is gunning for 20% ownership to report OXY pro rata earnings as part of Berkshire. I don’t remember the threshold.

Why would Stifel make that call?

perhaps WEB is gunning for 20% ownership to report OXY pro rata earnings as part of Berkshire. I don’t remember the threshold.

I doubt he would care about the consolidation, or want it, but there is a real benefit when it gets high enough that the dividend tax drops.
I believe the dividends received deduction rises from 50% to 65% when ownership passes 20%.
Then it doesn’t change again till you own 80%.

We’re not much below that I think based on latest figures?
So I would consider it effectively certain that they’ll go past 20%: the dumbest fraction to own would be something like 17-19%.
Either buying shares or exercising options.

Jim

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I believe the dividends received deduction rises from 50% to 65% when ownership passes 20%.
Then it doesn’t change again till you own 80%.

Those seem to be the correct numbers. Somewhat better than before the tax reform in 2017 that reduced a certain amount of the triple taxation. (Double taxation in the case of Berkshire, since it doesn’t pay a dividend, but then, you eventually get taxed on the capital gains…

We’re not much below that I think based on latest figures?
So I would consider it effectively certain that they’ll go past 20%

Yes, that seems so likely it’s hardly worth a poll. What about 80%? Just $33b to go! And for a company that is likely to pay out a very high dividend eventually, once it’s paid down its debt level, going from 35% taxation to zero might make a difference. If oil prices hold up and they keep any major portion of their current earnings yield of 11%, most of that might be paid out.

dtb

I wonder how the preferred equity would be counted for this tax deduction. Berkshire does own that other form of equity that isn’t included when we talk about the common and the warrants. One would think that counts as ‘ownership.’

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Just out of curiosity which companies would you prefer BRK to own more of over the remainder of its life:

BRK
Google
OXY
QQQE

Whatever money might be spent on OXY could also be used instead to purchase the others just as examples. It’s a competitive market.

Once Buffett owns 100% of OXY, its culture says no divorce. So you’re stuck with the decision - at least in Buffett’s eyes.


Woods, the XOM CEO, recently commented that it might take three to five years to work through the current supply-demand crunch in refining capacity and O&G supply. After that, the industry - still cyclical- might average the cost of capital return since it is highly competitive. Some will do better, some will do worse.

I don’t see OXY having any major moats over others in the industry, although it has some niche advantages. And it has far less resources than the majors in terms of project management, upstream-downstream integration, and worldwide infrastructure. This will be important during the industry transition over the next three decades.

OXY will probably be a damn good investment for the next 3-5 years. After that, it will just be part of the pack in O&G. I don’t understand the euphoria around buying the whole company versus other options. I do understand a 20% ownership.

If I understand correctly, BAC sent OXY to see Buffett. He didn’t pick it out. It was a rare recent case when he was the buyer of last resort, and he grabbed it. And he didn’t get aggressive until he was sent the transcript of the earnings report. Liked debt reduction, future higher dividends, future buybacks. All caused by a resumption in demand as the pandemic started coming under control. The Ukraine war an unexpected bonus.

Sounds familiar, we’ve seen it before. But not related to any deep understanding of O&G long range. In the past, he’s never stuck with it long range. Jim says he won’t touch it.

Of course, I don’t understand a lot of things and maybe I’m not seeing this particular tree for the forest around it.

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