Buffett’s Berkshire Hathaway gets approval to buy up to half of Occidental

Berkshire Hathaway on Friday won approval from a US energy regulator to buy up to 50 percent of Occidental Petroleum, giving Warren Buffett’s company the opportunity to increase its stake in one of the US oil industry’s leading producers.

The Federal Energy Regulatory Commission said Berkshire’s proposal to increase its stake in the $60 billion oil company, filed last month, was “consistent with the public interest.” Berkshire had requested “permission to acquire up to 50 percent” of Occidental, Ferc said.

The regulator weighed in on the application because of its potential effects on electricity markets in the Midwest. Occidental̵[ads1]7;s shares jumped 9.9 percent to $71.29 after the Ferc filing.

Buffett’s support was instrumental in Occidental’s $55 billion takeover of Anadarko Petroleum in 2019. Occidental CEO Vicki Hollub flew to Berkshire’s headquarters in Omaha, Nebraska, to secure a $10 billion financing package to close the deal. Berkshire took preferred stock as part of the deal and was granted warrants that now give the right to purchase up to 83.9 million shares of Occidental’s common stock.

But the transaction closed just months before the coronavirus pandemic hit oil prices, increasing pressure on Occidental after it had taken on heavy debt to finance the Anadarko deal.

Line chart of stock price ($) showing Occidental's market cap has declined

This year, Berkshire has spent billions of dollars buying shares of Occidental in the open market. Its position in the company recently eclipsed 20 percent, prompting speculation that Berkshire could buy the business outright.

Berkshire has moved more aggressively this year to step up investments as its cash pile has swelled and its energy industry bets have stood out. Along with buying tens of millions of shares in Occidental, Berkshire has plowed money into Chevron, which ranked among its biggest public investments at the end of the second quarter, worth about $24 billion.

Line chart of Occidental shares owned by Berkshire (% of outstanding) showing that in just months Berkshire amassed an outsized stake in Occidental

Jim Shanahan, an analyst with Edward Jones, estimated that Berkshire would soon exercise warrants to buy the 83.9 million shares, saving it more than $900 million based on Occidental’s current share price.

Berkshire did not respond to a request for comment.

An Occidental spokesman said the Ferc approval had been necessary for Berkshire to secure 50 percent of the producer’s common stock because it owned assets subject to Ferc’s regulation. The threshold for pre-approval was 25 percent, a level that Berkshire was approaching.

Buffett has invested in energy companies, but for years he has focused primarily on electric companies and pipelines. The businesses have been seen as a natural way for Berkshire to deploy the cash it generates, given the large capital projects they involve.

The anointing of Greg Abel as Buffett’s successor has also raised expectations of more energy investments, as he rose through Berkshire’s energy unit and worked on some of the company’s larger deals in the sector.

While the 2020 oil crash hit Occidental hard, forcing it to cut dividends and rein in drilling plans, it has been one of the stars of the recovery, as months of capital discipline and rising oil prices have repaired its debt-laden balance sheet.

Occidental has also sought to reposition itself as one of the sector’s leaders on climate, setting a goal of net zero emissions by 2050, including from the products it sells, installing renewable energy plants in Texas, and proposing to scale up carbon capture technology.

Its net zero strategy would also give it a “tax advantaged” position because of tax credits available for carbon capture techniques in the Inflation Reduction Act passed by Congress, said Paul Sankey, an oil analyst at Sankey Research.

“Buffett’s Oxy investment has been a home run so far,” said Andrew Gillick, strategist at consultancy Enverus. “Now he’s doubling down on a company that extracts free cash flow from traditional oil and gas and is becoming a leader in the kind of carbon reduction technology that the federal government supports.”

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