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Warren Buffett gets permission to purchase as much as half of Occidental Petroleum, boosting the shares

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Warren Buffett at press conference in the course of the Berkshire Hathaway Shareholders Meeting, April 30, 2022.

CNBC

Warren Buffett’s Berkshire Hathaway on Friday received regulatory approval to buy as much as 50% of oil giant Occidental Petroleum.

Shares of Occidental jumped 10% on the news to shut at $71.29 apiece, pushing their 2022 gains to greater than 145%.

On July 11, Berkshire filed an application with the Federal Energy Regulatory Commission to purchase more of the oil company’s common stock in secondary market transactions. The conglomerate argued that a maximum 50% stake would not hurt competition or diminish regulatory authority.

Carlos Clay, acting director of division of electrical power regulation, granted the permission Friday, saying authorization was “consistent with the general public interest.”

The conglomerate has already increased its Occidental stake drastically this 12 months. Berkshire currently owns 188.5 million shares of Occidental, equal to a 20.2% position. It surpassed a key threshold where Berkshire could record among the oil company’s earnings with its own, potentially adding billions of dollars in profit.

Berkshire also owns $10 billion of Occidental preferred stock, and has warrants to purchase one other 83.9 million common shares for $5 billion, or $59.62 each. The warrants were obtained as a part of the corporate’s 2019 deal that helped finance Occidental’s purchase of Anadarko. The stake would rise to almost 27% if Berkshire exercises those warrants.

Acquiring the entire company?

Friday’s news fueled speculation that Buffett will probably be interested by acquiring the entire company eventually after ramping up his stake at low prices.

“He’ll likely proceed to purchase as much as he can get below $70 or $75. For those who own 30% or 40% and would really like to purchase it out at $95 or $100, you saved a variety of money,” said Cole Smead, president of Smead Capital Management and a Berkshire shareholder. “This stock trades like a casino. The market is giving him all of the stock he wants.”

David Kass, a finance professor on the University of Maryland’s Robert H. Smith School of Business, said an acquisition down the road is probably going.

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“I feel it is probably going that Buffett will buy the entire thing eventually. The 50% limit could have been set to receive FERC approval for a non-controlling stake,” Kass said. “He clearly plans to buy additional shares. To this point his maximum purchase price has been $60.37 per share.”

Some speculated that Berkshire and Occidental had been in communication concerning the potential move to extend the stake to as much as 50%.

“He has all the time said he would only do friendly deals, in order that he could have agreed with the OXY board on that limit,” said Bill Stone, CIO of The Glenview Trust Company and a Berkshire shareholder.

‘Made nothing but sense’

The “Oracle of Omaha” began buying the stock after reading through Occidental’s annual report and gaining confidence in the corporate’s growth and its leadership.

“What Vicki Hollub was saying made nothing but sense. And I made a decision that it was an excellent place to place Berkshire’s money,” Buffett said of Occidental’s CEO during Berkshire’s annual meeting in April.

“Vicki was saying what the corporate had passed through and where it was now and what they planned to do with the cash,” he added.

Occidental has been the best-performing stock within the S&P 500, benefiting from surging 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 12 months, in response to data from VandaTrack.

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