Warren Buffett’s attempt to bolster his large stake in Occidental Petroleum Corp.
Even further, it is not expected to serve as a prelude to the widespread billionaire’s full takeover of the revamped energy company, at least for now.
In a regulatory filing on Friday, the Federal Energy Regulatory Commission said that Mr. Buffett’s Berkshire Hathaway Inc.
had been granted permission to buy up to 50% of the driller’s shares. The news sparked speculation that Berkshire could 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 Chief Executive Vicki Hollub and has publicly praised her efforts to turn the company around after it bought Anadarko Petroleum Corp. and its plans to pay down debt and increase dividend payments.
But Mr. Buffett has not informed Occidental of plans to acquire a controlling stake in the company, according to people familiar with the matter. Given Mr. Buffett’s well-known aversion to making hostile deals, it would be out of character for him to make a bid without first hearing from the company’s executives and directors.
Owning such a large stake – Berkshire is Occidental’s largest shareholder – already gives him a lot of influence over the company, and gaining control could cost him a large premium to the stock’s current price. The stock 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 Occidental?
First, it came close to running afoul of FERC-imposed investment limits.
Filings show that Berkshire currently has a 20% stake in Occidental. He also has warrants to buy another 83.9 million shares of common stock and 100,000 shares of preferred stock that pay a hefty dividend—both of which he acquired after helping Occidental finance its 2019 acquisition of Anadarko.
If Berkshire exercised the warrants, its stake would rise to about 27%. That would have exceeded the 25% limit allowed by FERC before Friday’s decision.
“This is not a company that’s going to increase regulatory attacks,” said Cathy Seifert, an analyst at CFRA Research.
It should also give Berkshire breathing room in case share buybacks or another company’s moves reduce the amount of shares outstanding, thereby increasing its stake.
There are other reasons to doubt that a Berkshire takeover of Occidental is imminent.
One of them is price, said David Kass, professor of economics at the University of Maryland’s Robert H. Smith School of Business.
So far, Berkshire has bought nearly all of Occidental’s shares at a price in the $50 to $60 range, Mr. Kass said. The highest price Berkshire paid 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. Shares are up 146% for the year, boosted by the oil price rally, compared with an 11% decline for the S&P 500.
People familiar with the discussions at Occidental said the company’s leadership believes Mr. Buffett may consider making an offer if oil prices fall, depressing Occidental’s share price. If Mr. Buffett made an offer the company thought was fair, a majority of Occidental’s board would likely approve its presentation to shareholders, one of the people said.
Mr. Buffett did not respond to a request for comment. A spokesman for Occidental declined to comment.
Mr. Buffett is currently represented as a passive shareholder in Occidental, according to a so-called 13G filing with the US Securities and Exchange Commission. If he were to change his intentions and engage in meaningful discussions with the company regarding a full takeover, he would likely need to change his 13D filing, which is required of large shareholders who intend to actively participate in the management of a Company.
Taxes could also play a role in Mr. Buffett’s push for a larger minority stake in Occidental. Companies with at least 20% in another company are entitled to deduct 65% of the dividends they receive, up from 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 give its earnings a boost of several billion dollars a year, based on analysts’ estimates of Occidental’s earnings. Before the most recent purchases, disclosed 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. Hollub, and the pair speak regularly, according to people familiar with the matter.
When Mr. Buffett bought another chunk of Occidental stock this spring, he called Ms. Hollub to tell her about the transaction, according to one of the people. Ms. Hollub was driving at the time and pulled over to take the call, the person said.
Mr. Buffett’s message was simple: “Keep doing what you’re doing,” he told Ms. Hollumb.
Berkshire’s growing ties to Occidental have an unexpected connection to Mr. Buffett’s early 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 bought the oil company, which Ms. Hollub had just joined the year before.
Mr. Buffett’s investment in Occidental this year shows that his first stock purchases “come full circle 80 years later,” Mr. Kass said.
—Benoît Morenne contributed to this article.
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