Just when we thought we had heard the last from Warren Buffett about his stalking of Occidental Petroleum, up pops another development that has changed the story completely.
Rather than be a careful investor, building a stake in a company in an out of favour sector (oil and gas), Buffett and Berkshire can now be viewed as a potential bidder for Occidental, with an intriguing saver on the much larger energy giant, Chevron.
After building a 20.2% stake in mid-level energy group Occidental Petroleum this year at a time of soaring oil and gas prices, as well as emerging as the biggest shareholder in Chevron, Buffett and Berkshire Friday shocked Wall Street by being given official approval to go to a 50% stake in Occidental.
As well as owning one of the ‘greenest’ of America’s utilities (in Berkshire Hathaway Energy, said be valued at around $US100 billion), Buffett is now the largest single investor in the US energy sector with a near $US26 billion stake in Chevron (and its biggest shareholder) and the $US12 billion stake in Occidental.
Friday’s announcement from the Federal Energy Regulatory Commission sent Occidental shares up 9.9% to $US71.29 or a value of just over $US60 billion.
The regulator said Berkshire’s proposal to increase its stake in the $US60 billion oil company, filed on July 11, was “consistent with the public interest”. Berkshire had requested “authorisation to acquire up to 50 per cent” of Occidental.
The previous regulatory limit was 25% (which markets didn’t know about), so it is clear that Buffett plans to go beyond that level in the near future.
The stance in Occidental is very different to a request to bank regulators in 2016 to take Berkshire’s holding in Well Fargo (at that time one of its so-called pillar investments) beyond 10%. That was denied because of the close financial links Berkshire had with Wells Fargo, soon after Buffett started selling off its Wells Fargo shares (helped by a series of scandals in the senior management and boardroom about product miss-selling and financial abuse of thousands of employees).
The regulator’s approval was needed because of its potential effects on Midwestern electricity markets where Berkshire Hathaway Energy is a dominant utility, with lots of wind and solar as well as gas pipelines across the region.
Buffett’s support was instrumental in Occidental’s $US55 billion takeover of Anadarko Petroleum in 2019. Occidental CEO Vicki Hollub flew to Berkshire’s headquarters in Omaha to secure a $US10 billion financing package to complete the deal when finding the money elsewhere proved to be too hard.
Berkshire took preferred shares as part of the deal and was given warrants that now entitle it to buy up to 83.9 million Occidental shares which would take Buffett’s stake to just over 30%.
But the takeover was done just months before the coronavirus pandemic hit oil prices in early 2020 which in turn sa pressure the Occidental share price whacked hard by nervous investors worried about all the debt taken on to finance the takeover.
Occident shares fell to a low of $US10.23 in March, 2020 and could only manage to recover to around $US29 by the end of 2021. A few weeks later Buffett started buy its shares (and those of Chevron).
Even though world oil prices surged after Russia’s invasion of Ukraine in late February, Buffett has spent billions of dollars buying Occidental shares (and has topped up the Chevron stake as well), reaching 20% in late July.
It has been a startling contrarian investment play by the world’s most-followed investor and one that has made every rival or would be peer in hedge funds, private equity and the likes of Blackrock, Blackstone etc look flat footed, for the moment.
Friday’s news and the 9.9% jump in Occidental shares boosted its rise so far in 2022 to 145% – Buffett’s buying is a big part of this, so there would be little in the way of a huge capital gain but he has shaken the assumptions of millions of investors about energy investment.’
Buffett has said he started buying the shares after reading through Occidental’s annual report and gaining confidence in the company’s growth and its leadership.
“What Vicki Hollub was saying made nothing but sense. And I decided that it was a good place to put Berkshire’s money,” Buffett said of Occidental’s CEO during Berkshire’s annual meeting in April.
“Vicki was saying what the company had gone through and where it was now and what they planned to do with the money,” he added.
“She says she doesn’t know the price of oil next year. Nobody does,” Buffett said. “But we decided it made sense.”
So will there be a bid? Buffett and Berkshire are saying nothing – the usual stance from him. The speculation in the markets ranges from a ’yes’ to a series of qualified ’nos’, in other words, your guess is as good as theirs.
