Berkshire Hathaway and Occidental Petroleum
Warren Buffett’s Berkshire Hathaway (BRK.A) (BRK.B) has just gobbled another ~1% of Occidental (OXY). With this purchase, Berkshire's total stake in OXY should now exceed 28% unless I miscalculated. In my opinion, it looks like a creeping and reversible (!) takeover despite whatever Buffett says. Let me explain.
We know that Buffett thinks OXY is worth much more than $60 per share; otherwise, it is impossible to explain his earlier buying of OXY in the high fifties and low sixties.
There is another logic to support the same conclusion. OXY’s intrinsic value today in Buffett’s eyes should be more than in 2019 when he purchased the $60 warrants alongside preferred shares because of several reasons:
Buffett has repeatedly expressed his high regard for Vicki Hollub, making it clear that he values her leadership. It's unlikely he would have invested in OXY without confidence in her capabilities. Over five years since 2019, it's reasonable to conclude that she has significantly enhanced the company's value.
US energy in general is more valuable now than in 2019 due to sanctions on Russian oil, increasing exports of US gas to Europe, and the dramatic increase in overall energy demands from data centers and the AI revolution.
Berkshire would benefit from a full takeover of OXY, including avoiding double taxation on dividends and gaining direct access to all of OXY’s cash flows. So why hasn’t Berkshire pursued this option immediately?
One possible reason could be the $8.5 billion in preferred shares it currently holds, which represent nearly 20% of OXY’s market capitalization. These preferred shares provide a lucrative 8% annual dividend, making them an attractive income-generating asset that Berkshire might be reluctant to forgo.
From Berkshire's perspective, it’s logical to allow OXY the opportunity to repurchase the preferred shares first, all while continuing to earn an attractive 8% yield in the meantime. Put simply, Berkshire may not pursue a takeover of OXY as long as it retains ownership of these lucrative preferred shares. In case of a prior takeover by BRK, the value of these preferreds would become zero.
When years down the road, OXY buys back the preferreds, BRK’s actions will be dependent on OXY’s price. If low, BRK may proceed with the takeover at the reduced price because of already owning a big stake in OXY. Otherwise, it will benefit from rising OXY shares.
The whole process will take a long time and Buffett does not risk much saying that BRK does not intend to acquire OXY. It may be up to Mr. Abel to make this decision.
This logic supports holding OXY shares as a long-term investment. However, I don’t own OXY or any other oil company, apart from midstream players. Years ago, I realized I’m not skilled at predicting oil prices. OXY is a very long game and unlike BRK, my investment horizon is limited by my lifespan.
I forgot to include an important consequence. Since it is common shareholders who bear the cost of paying preferred dividends, it wouldn’t make much sense for Buffett to continue adding to BRK’s common position when it is already in the high twenties! It holds unless OXY is severely undervalued, as it became when Buffett recently pounced. This logic explains why Buffett stopped adding to BRK's position until OXY fell to a level he considered irresistibly low.
Looking ahead, we might expect a similar pattern of BRK buying OXY shares. It could persist for many years, assuming no changes to OXY’s fundamentals.