Berkshire Hathaway won the approval of a US energy regulator on Friday to buy up to 50 per cent in Occidental Petroleum, giving Warren Buffett’s company the option to vastly increase its stake in one of the US oil industry’s most storied producers.
The Federal Energy Regulatory Commission said Berkshire’s proposal to increase its stake in the $60bn oil company, filed last month, was “consistent with the public interest”. Berkshire had requested “authorisation to acquire up to 50 per cent” of Occidental, Ferc said.
Because of the potential impact on Midwestern electricity markets, the regulator intervened in the matter. Occidental’s shares jumped 9.9 per cent to $71.29 after the Ferc filing.
Buffett’s support was instrumental in Occidental’s $55bn takeover of Anadarko Petroleum in 2019. Occidental chief executive Vicki Hollub 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 given warrants that now entitle it to buy up to 83.9mn shares of Occidental’s common stock.
However, the transaction was closed months before the coronavirus outbreak hit oil prices. This placed pressure on Occidental because it had taken on large loans to finance the Anadarko deal.
Berkshire spent billions of dollars this year to buy shares in Occidental on the open market. Recent data suggests that Berkshire may be interested in buying the entire business.
As its cash pile has grown, Berkshire has been more aggressive in this year’s investments. Its bets on the energy sector have stood out. Berkshire bought tens to millions of shares of Occidental. It also invested money in Chevron, which was valued at about $24bn.
Jim Shanahan, an analyst with Edward Jones, estimated Berkshire would soon exercise the warrants to buy the 83.9mn shares, saving it more than $900mn based on Occidental’s current share price.
Berkshire did no respond to a request for comment.
An Occidental spokesman said the Ferc approval had been necessary for Berkshire to secure 50 per cent of the producer’s common shares because it owned assets subject to Ferc’s regulation. Berkshire was nearing the threshold of 25 percent for prior approval.
Buffett has made investments in energy companies but has focused his investment on electric utilities and pipelines for many years. Given the large capital projects involved, these businesses are a natural way that Berkshire can deploy the cash it generates.
The anointment of Greg Abel as Buffett’s successor has also stoked expectations of more energy investment, as he rose through Berkshire’s energy unit and worked on some of the company’s bigger deals in the sector.
Occidental was hard hit by the 2020 oil crisis, which forced it to cut its dividend and halt drilling plans. However, it has been a shining star of recovery as months and months of capital discipline and rising prices have restored the debt-laden balance.
Occidental has also sought to reposition itself as one of the sector’s leaders on climate, setting a target for net zero emissions by 2050, including from the products it sells, installing renewable energy facilities in Texas, and proposing to scale up carbon capture technology.
Its net zero strategy would also leave it in a “tax advantaged” position because of tax credits available for carbon capture techniques in the Inflation Reduction Act passed by Congress, said Paul Sankey, an oil analyst at Sankey Research.
“Buffett’s Oxy investment has been a home run so far,” said Andrew Gillick, strategist at consultancy Enverus. “Now he’s doubling down on a company that is churning out free cash flow from traditional oil and gas, and is about to be a leader in the kind of carbon reduction technology the federal government is supporting.”
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