Buffett’s Berkshire Hathaway wins approval to buy half of Occidental

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

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

The regulator weighed in on the application because of its potential effects on Midwestern electricity markets. Shares of Occidental jumped 9.9 percent to $71.29 after the Ferc filing.

Buffett’s support was instrumental in the $55bn acquisition of Anadarko Petroleum in 2019. Occidental chief executive Vicki Holb flew to Berkshire’s headquarters in Omaha, Nebraska to secure a $10bn financing package to close the deal. Berkshire took preferred shares as part of the deal and was granted a warrant that now gives it the right to purchase 83.9 million shares of Occidental’s common stock.

But as the coronavirus pandemic hit oil prices just months before the transaction closed, pressure on Occidental mounted after taking out large debt to finance the Anadarko deal.

This year Berkshire has spent billions of dollars buying Occidental shares on the open market. Its position in the company has recently assumed 20 percent, leading to speculation that Berkshire may buy the business outright.

Berkshire has moved more aggressively this year to raise investments as its cash pile has grown, and its bets on the energy industry stand out. As well as buying millions of shares of Occidental, Berkshire has put money in Chevron, one of its largest public investments at the end of the second quarter, worth about $24 billion.

Line chart (% of outstanding) of Berkshire-owned Occidental shares showing that Berkshire has accumulated an outside stake in Occidental within a few months

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

Berkshire did not respond to a request for comment.

An Occidental spokesman said Ferc’s approval was necessary for Berkshire to secure 50 percent of the manufacturer’s common shares because it owned assets subject to Ferc’s regulation. The pre-approval limit was 25 percent, with Berkshire approaching a level.

Buffett has invested in energy companies, but over the years he has primarily targeted electric utilities and pipelines. The businesses have been seen as a natural way for Berkshire to deploy the cash it generates while looking at large capital projects.

The anointing of Greg Abel as Buffett’s successor has also fueled hopes for more energy investments, as he rose through Berkshire’s energy arm and worked on some of the company’s big deals in the region.

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

Occidental has sought to re-establish itself as one of the region’s leaders on climate, setting a target for net zero emissions by 2050, including the products it sells, installing renewable energy facilities in Texas and proposes to enhance the carbon capture technology.

Paul Sankey, an oil analyst at Sankey Research, said its net zero strategy would leave it in a “tax advantage” position because of the tax credits available for carbon capture technologies in the Inflation Reduction Act passed by Congress.

“Buffett’s Oxy investment so far has been a home run,” said Andrew Gillick, strategist at consultancy Enversus. “Now he’s doubling down on a company that’s churning out free cash flow from conventional oil and gas, and is going to be a leader in the kind of carbon reduction technology it’s supporting.”

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