Friday’s news that Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) won approval from U.S. regulators to buy as much as 50% of Occidental Petroleum (NYSE:OXY) has sparked speculation that Buffett might eventually acquire the whole company.
“No question Buffett goes to 50% from here,” said Bill Smead of Smead Capital Management and a shareholder in both Occidental (OXY) and Berkshire (BRK.A) (BRK.B), adding that the moves are looking more and more like 2009-10 when Buffett amassed a significant stake in Burlington Northern Santa Fe railroad before buying the entire company.
“It is likely that Buffett will buy the whole thing eventually,” University of Maryland finance professor David Kass told CNBC. “The 50% limit may have been set to receive FERC approval for a non-controlling stake.”
Occidental’s (OXY) deep spending cuts, aggressive debt repayment and cash generating capabilities – $4.2B in free cash flow in Q2 – have made the company an attractive target for Buffett, Truist Securities’ Neal Dingmann said, adding the stock is “a great sort of hedge against a lot of his other businesses to own such a high free-cash-flowing business.”
Occidental (OXY) would work better as a subsidiary of Berkshire (BRK.A) (BRK.B) than a stock holding “given the volatility that exists in the energy/commodity markets,” according to Morningstar’s Greggory Warren, adding “this could end up evolving into a slow-motion takeover where Berkshire buys up to the stakes that FERC allows it to acquire until it can acquire OXY whole.”
Occidental (OXY) is the best performer in the S&P 500 this year, up 146% YTD compared with the index’s 11% decline, and it topped Friday’s S&P leaderboard with a 9.8% gain.
Buffett has made no secret of his admiration of Occidental (OXY) CEO Vicki Hollub, saying the company “looked like a good place to put Berkshire’s money” during Berkshire’s (BRK.A) (BRK.B) annual shareholder meeting in April.