Warren Buffett at the press conference during Berkshire Hathaway’s shareholder meeting, April 30, 2022.
Warren Buffett’s Berkshire Hathaway received regulatory approval on Friday to buy up to 50% of oil giant Occidental Petroleum.
Occidental’s shares rose 10% on the news to above $70 each, pushing 2022 earnings to more than 140%.
On July 11, Berkshire filed an application with the Federal Energy Regulatory Commission to buy more of the oil company’s common stock in secondary market transactions. The conglomerate argued that a maximum stake of 50% would not harm competition or diminish regulatory authority.
Carlos Clay, acting director of the Division of Electric Power Regulation, granted the permit Friday, saying the authorization was “in accordance with the public interest.”
The conglomerate has already dramatically increased its stake in Occidental this year. Berkshire currently owns 188.5 million shares of Occidental, equivalent to a 20.2% position. It passed a key threshold where Berkshire could book some of the oil company’s earnings with its own, potentially adding billions of dollars in profits.
Berkshire also owns $10 billion of Western preferred stock and has warrants to buy another 83.9 million common shares for $5 billion, or $59.62 each. The orders were obtained as part of the company Agreement 2019 which he helped finance Occidental’s purchase of Anadarko. The stake would rise to nearly 27% if Berkshire exercises those warrants.
Acquire the entire company?
Friday’s news fueled speculation that Buffett will be interested in acquiring the entire company after increasing his stake at low prices.
“He’s probably going to continue to buy as much as he can get below $70 or $75. If you’re 30% or 40% off and you want to buy it at $95 or $100, you’ve saved a lot of money,” Cole Smead said. chairman of Smead Capital Management and Berkshire shareholder. “These stocks trade like a casino. The market is giving him all the stocks he wants.”
David Kass, professor of finance at the University of Maryland’s Robert H. Smith School of Business, said an acquisition is likely later.
“I think it’s likely that Buffett will buy the whole lot eventually. The 50% cap could have been put in place to get FERC approval for a non-controlling interest,” Kass said. “It is clear that he plans to buy additional shares. So far, his maximum purchase price has been $60.37 per share.”
Some speculated that Berkshire and Occidental had been in communication about the possible move to increase the stake to 50%.
“He’s always said he would only make amicable deals, so he could have agreed to that cap with the OXY board,” said Bill Stone, chief data officer at The Glenview Trust Company and a Berkshire shareholder.
“It made nothing but sense”
The “Oracle of Omaha” began buying the stock after reading Occidental’s annual report and gaining confidence in the company’s growth and leadership.
“What Vicki Hollub was saying made nothing but sense. And I decided 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 were planning to do with the money,” he added.
Occidental has been the best performing stock in the S&P 500, benefiting from higher 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 year, according to VandaTrack data.