Warren Buffett at a press conference during the Berkshire Hathaway Shareholders’ Meeting, April 30, 2022.
Warren Buffett’s Berkshire Hathaway received approval Friday to buy up to 50% of oil giant Occidental Petroleum.
Shares of Occidental rose 10% on the news to above $70 apiece, pushing their profits to more than 140% in 2022.
On July 11, Berkshire filed with the Federal Energy Regulatory Commission to buy more common stock of the oil company in secondary market transactions. The conglomerate argued that a stake of up to 50% would not harm competition or diminish regulatory power.
Carlos Clay, acting director of the electricity regulation division, granted the permission Friday, saying the permission was “in accordance with the public interest”.
The conglomerate has already dramatically increased its stake in Occidental this year. Berkshire currently owns 188.5 million shares of Occidental, which is equivalent to a 20.2% position. It surpassed a major threshold where Berkshire could absorb a portion of the oil company’s earnings with its own revenue, potentially bringing in billions of dollars in profit.
Berkshire also owns $10 billion in Occidental preferred stock and has warrants to purchase an additional 83.9 million common stock for $5 billion, or $59.62 each. The warrants were acquired as part of the company’s 2019 deal that helped finance Occidental’s purchase of Anadarko. The stake would rise to nearly 27% if Berkshire exercises those warrants.
Take over the entire company?
Friday’s news fueled speculation that Buffett will eventually be interested in acquiring the entire company after increasing his stake at low prices.
“He’ll probably keep buying as much as he can get under $70 or $75. If you own 30% or 40% and want to buy it out for $95 or $100, you’ve saved a lot of money,” said Cole Smead, president of Smead Capital Management and a Berkshire shareholder. “This stock acts like a casino. The market gives it all the stock it wants.”
David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business, said a takeover is likely in the future.
“I think it’s likely that Buffett will eventually buy the whole thing. The 50% cap may have been set to get FERC approval for a minority stake,” Kass said. “He clearly intends to buy additional shares. Until now, his maximum purchase price has been $60.37 per share.”
Some speculated that Berkshire and Occidental had communicated about the potential move to increase the stake to 50%.
“He’s always said he would only make friendly deals so he could agree with the OXY board on that limit,” said Bill Stone, CIO of The Glenview Trust Company and a Berkshire shareholder.
‘Nothing but logical’
The Oracle of Omaha began buying the stock after reading Occidental’s annual report and gaining confidence in the company’s growth and leadership.
“What Vicki Hollub said only made sense. And I decided it was a good place to put Berkshire’s money,” Buffett said of Occidental’s CEO at Berkshire’s April meeting.
“Vicki said what the company had been through and where it was now and what they planned to do with the money,” he added.
Occidental was the best-performing stock in the S&P 500, benefiting from rising oil prices.
Buffett’s growing bet on Occidental has inspired a legion of small investors to follow suit, making it a favorite retail stock this year, according to data from VandaTrack.
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