Warren Buffett’s offer to raise his big bet in
Occidental Petroleum corp.
even more is not expected to serve as a prelude to a full takeover of the resurgent energy company by the widely watched billionaire, at least for now.
In a regulatory filing on Friday, the Federal Energy Regulatory Commission said Mr. Buffett’s
Berkshire Hathaway Inc.
was granted permission to purchase up to 50% of the well’s shares. The news sparked speculation that Berkshire may be preparing to acquire Occidental.
Analysts said Occidental’s oil business would complement Berkshire’s existing energy holdings, which include utilities, natural gas and renewables. Mr. Buffett has a warm relationship with CEO Vicki Holub and publicly praised her efforts to turn the company around after acquiring Anadarko Petroleum Corp. and its plans to pay down debt and increase dividend payments.
But Mr. Buffett has not informed Occidental of any plans to acquire a controlling stake in the company, according to people familiar with the matter. Given Mr. Buffett’s well-known aversion to hostile takeovers, it would be out of character for him to make an offer without first vetting the company’s executives and directors.
Owning such a large stake – Berkshire is Occidental’s largest shareholder – already gives him a lot of leverage over the company, and gaining control could cost him a hefty premium to the current share price. Shares closed Friday at $71.29, up nearly 10% on the news, giving the company a market capitalization of about $66 billion.
So why would Berkshire seek permission to buy more of Occidental?
For one thing, it came close to imposing investment restrictions imposed by FERC.
Berkshire currently has a 20% stake in Occidental, the filings show. In addition, there are warrants to purchase another 83.9 million common shares and 100,000 preferred shares that pay a solid dividend – both acquired after helping Occidental finance the acquisition of Anadarko in 2019.
If Berkshire exercises the warrants, its stake will grow to approximately 27%. That would exceed the 25% cap allowed by FERC before Friday’s decision.
“This is not a company that’s going to get regulators riled up,” said Kathy Seifert, an analyst at CFRA Research.
It should also give Berkshire some breathing room in case share buybacks or other company actions reduce the amount of shares outstanding, thereby increasing its percentage stake.
There are other reasons to doubt that a Berkshire takeover of Occidental is inevitable.
One is cost, said David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business.
So far, Berkshire has bought back almost all of its Occidental shares at a price in the $50 to $60 range, Mr. Kass said. The highest price paid by Berkshire was $60.37 in July, according to the filings.
Mr. Buffett is a well-known bargain hunter, so it’s hard to imagine Berkshire rushing to buy more Occidental shares at the current price, Mr. Kass said. The stock is up 146% for the year, boosted by rising oil prices, compared with an 11% decline for the S&P 500.
People familiar with the discussions at Occidental said the company’s management believed Mr. Buffett might consider making a bid if oil prices fell, driving down Occidental’s share price. If Mr. Buffett makes an offer that the company believes is fair, a majority of Occidental’s board is likely to approve its presentation to shareholders, one of the people said.
Mr. Buffett did not respond to a request for comment. An Occidental spokesman declined to comment.
Mr. Buffett is currently listed as a passive shareholder in Occidental based on a so-called 13G filing it has on file with the US Securities and Exchange Commission. If he were to change his mind and engage in meaningful discussions with the company about a full takeover, he would likely need to amend his 13D filing, which is required of large shareholders who intend to become actively involved in the management of a trading company.
Taxes could also play a role in Mr. Buffett’s bid for a larger minority stake in Occidental. Corporations with a stake of at least 20% in another company are allowed to deduct 65% of dividends received, compared to the standard 50%.
Berkshire’s 20% stake also allows it to include a proportionate share of Occidental’s profits in its own results. That could boost its profits by billions of dollars a year, based on analysts’ estimates for Occidental’s earnings. Before the latest purchases announced this month, Occidental fell below the 20% threshold for both benefits.
Since Berkshire began buying Occidental shares in February, Mr. Buffett has had a friendly and cooperative relationship with Ms. Holub, and the two talk regularly, according to people familiar with the matter.
When Mr. Buffett bought another piece of Occidental stock this spring, he called Ms. Holub to let her know about the deal, according to one of the people. Ms Holub was driving at the time and stopped to take the call, the person said.
Mr. Buffett’s message was simple: “Keep doing what you’re doing,” he told Ms. Holub.
Berkshire’s growing ties to Occidental have an unexpected connection to Mr. Buffett’s earliest investing days.
At age 11 in 1942, Mr. Buffett made his first investment: three shares of Cities Service’s preferred stock. Forty years later, Occidental acquired the oil company that Ms. Holub had just joined a year earlier.
Mr. Buffett’s investment in Occidental this year saw his first stock purchases “come full circle 80 years later,” Mr. Kass said.
— Benoit Morin contributed to this article.
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