Warren Buffett’s Offer to Increase His Large Holding in Occidental Petroleum Corp.
even more should not serve as a prelude to a full takeover of the resurgent energy company by the widely observed billionaire, at least for now.
In a regulatory filing on Friday, the Federal Energy Regulatory Commission said Buffett’s Berkshire Hathaway Inc.
had received permission to buy up to 50% of the driller’s shares. The news fueled speculation that Berkshire could be preparing to acquire Occidental.
Analysts said Occidental’s oil business would complement Berkshire’s current energy holdings, which include utilities, natural gas and renewables. Mr. Buffett has a warm relationship with Chief Executive Vicki Hollub and has publicly praised her efforts to turn the company around following the acquisition of Anadarko Petroleum Corp. and its plans to pay off debt and increase dividend payments.
But Buffett did not inform Occidental of any plans to acquire a controlling interest in the company, according to people familiar with the matter. Given Buffett’s well-known aversion to hostile negotiations, it would not be normal for him to make an offer without first sounding out the company’s executives and directors.
Owning such a large stake – Berkshire is Occidental’s largest shareholder – already gives you great influence over the company, and acquiring control can cost you a hefty premium to the current share price. Shares closed Friday at $71.29, nearly 10% above the news, giving the company a market capitalization of around $66 billion.
Why would Berkshire seek permission to buy more from Occidental, then?
On the one hand, it was close to running against the investment limits imposed by the FERC.
Records show that Berkshire currently has a 20% stake in Occidental. It also has guarantees to buy another 83.9 million shares of common stock and 100,000 preferred shares that pay a nice dividend — both acquired after helping Occidental finance its 2019 acquisition of Anadarko.
If Berkshire were to exercise the warrants, its stake would increase to approximately 27%. That would have exceeded the 25% threshold allowed by the FERC before Friday’s ruling.
“This is not a company that will raise the irritation of regulators,” said Cathy Seifert, an analyst at CFRA Research.
It should also give Berkshire breathing room if share buybacks or other moves by the company decrease the amount of shares outstanding, thereby increasing its percentage stake.
There are other reasons to doubt that a takeover of Occidental by Berkshire is imminent.
One is price, said David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business.
So far, Berkshire has bought virtually all of Occidental’s stock at a price in the $50 to $60 range, Kass said. The highest price Berkshire paid was $60.37 in July, according to the records.
Buffett is a well-known bargain hunter, so it’s hard to imagine Berkshire rushing to buy more Occidental shares at the current price, Kass said. Stocks are up 146% on the year, driven by a rally in the price of oil, compared with an 11% drop for the S&P 500.
People familiar with Occidental’s deliberations said the company’s leadership believes Buffett may consider making an offer if oil prices fall, pushing down Occidental’s share price. If Buffett made an offer that the company thought was fair, a majority of Occidental’s board would likely approve the presentation to shareholders, one of the people said.
Buffett did not respond to a request for comment. An Occidental spokesperson declined to comment.
Mr. Buffett is currently represented as a passive shareholder in Occidental, based on the so-called 13G filing he has filed with the US Securities and Exchange Commission. If he changed his intentions and had meaningful discussions with the company about a full takeover, he would likely need to change his registration to a 13D, which is required by large shareholders who intend to be actively involved in running a company.
Taxes could also play a role in Buffett’s bid for a larger minority stake in Occidental. Companies with at least a 20% stake in another company can deduct 65% of dividends received, up from the standard 50%.
Berkshire’s 20% stake also allows it to include a proportionate share of Occidental’s profits in its own results. That could give its earnings a billion-dollar boost annually, based on analyst estimates of Occidental’s earnings. Ahead of its most recent purchases, released this month, Occidental fell below the 20% threshold for both benefits.
Since Berkshire began buying Occidental shares in February, Buffett has had a friendly, collaborative relationship with Hollub, and the two speak regularly, according to people familiar with the matter.
When Buffett bought another batch of Occidental stock this spring, he called Hollub to let her know about the transaction, according to one of the people. Mrs. Hollub was driving at the time and stopped to take the call, the person said.
Buffett’s message was simple: “Keep doing what you’re doing,” he told Hollub.
Berkshire’s growing ties to Occidental have an unexpected link to Buffett’s early investing days.
At age 11, in 1942, Buffett made his first investment: three preferred shares of Cities Service. Forty years later, Occidental acquired the oil company, in which Ms. Hollub had just joined the previous year.
Buffett’s investment in Occidental this year shows his first stock purchases “coming full circle 80 years later,” Kass said.
—Benoît Morenne contributed to this article.
write to Akane Otani at email@example.com, Christopher M. Matthews at firstname.lastname@example.org, and Cara Lombardo at email@example.com
Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8