Buffett’s BerkshireHathaway began buying Occidental shares in 2019 when it purchased $10 billion worth of preferred stock to assist the company with financing a deal for a competition. The warrants were for 83.9 million shares.
Analysts believe Buffett, who earlier this year told shareholders that cash is like oxygen and is attracted to estimates showing Occidental has a high cash flow potential, is being attracted by these estimates. This week, he added 4.3 million to his direct holdings, bringing them to 179.4 millions. Stock is up by 80% this year.
Berkshire declined comment to the story about the shares purchased.
Occidental, which had suffered from near-death experiences of piling up debts to buy Anadarko Petroleum at $35.7 billion right before the COVID-19 oil shortage cratered oil demand, has made a comeback. Oil recovery has helped to accelerate debt repayments, and cut its interest costs.
Buffett can book a fifth Occidental’s profit via its Berkshire Energy subsidiary once he reaches 20% ownership. He could also continue to invest in the company and purchase it for its cash flow. Refinitiv estimates that Occidental will have a cash flow of $19.36billion this year, compared to $3.84billion two years earlier.
Buffett is believed to be following the same pattern as Burlington Northern Santa Fe Corp.
Berkshire had $106.3 billion of cash at the end March.
Paul Sankey, an analyst in oil, stated that holding cash is a risky undertaking. He believes Buffett has plans to use the money. He said that a debt-free Oxy would be a cash engine of the type Buffett favors.
According to Neal Dingmann, Truist Securities, a buyout could allow for more than $2B in administrative and interest expenses this year. He considers the chances of a Buffett deal to be good.
It almost feels like an annuity. It’s a great offset to his rail and other business,” Dingmann said, referring specifically to BNSF.
A deal would reduce Occidental’s exposure for investor calls to switch from fossil fuels and renewables, or to slow growth in favor of profits. Harold Hamm has offered to purchase Continental Resources, the U.S. petroleum company he established, at a valuation of $25 billion.
Hamm explained that the “opportunity today” is with private companies, who are free to operate and not bound by public markets.
Truist’s Dingmann sees Occidental’s Low Carbon Ventures in the best possible light if Washington funds projects to reduce emissions or increase tax credits for carbon capture projects.
Buffett’s desire to have a company in a cyclical sector is not shared by everyone.
Carol Levenson, analyst at Gimme Credit, stated that all energy companies Berkshire has are regulated with low business risk.
Berkshire does not believe that taking Occidental private is in line with its policy of avoiding boom-bust industries and she stated that Occidental would resist such a move.
“I don’t think Oxy would go quiet, having shown a desire to remain independently,” she said.