Warren Buffett’s investment firm, Berkshire Hathaway, could soon reveal its stance on Occidental Petroleum’s controversial acquisition of CrownRock for $12 billion. As the largest shareholder of Occidental Petroleum, Berkshire Hathaway holds approximately 26% of the company’s stake, which is valued at $12.8 billion.
Since late October, Berkshire Hathaway has not disclosed any stock purchases in Occidental Petroleum. In the last disclosed transaction, Berkshire acquired nearly four million shares at around $63 per share. As a significant stakeholder with over 10% ownership, Berkshire Hathaway is required to report any purchases or sales within two business days.
Considering that the deal was announced on Monday and Occidental Petroleum’s stock is currently trading below $56, Berkshire Hathaway may file a report on new purchases as early as Wednesday after trading hours. Historically, Berkshire has displayed interest in buying the stock whenever it has traded below $60 this year.
It is speculated that Berkshire Hathaway, being the largest shareholder of Occidental Petroleum, was aware of the deal but did not make any moves during the negotiation phase.
Vicki Hollub, CEO of Occidental Petroleum, confirmed that the company’s corporate jet recently visited Omaha, where Berkshire Hathaway is headquartered. However, she did not disclose whether she had a meeting with Warren Buffett. “I’m not always there to talk about business,” she explained.
Warren Buffett has expressed admiration for Hollub’s management skills and praised her during Berkshire Hathaway’s annual meeting in May.
Interestingly, Berkshire Hathaway was not mentioned in Occidental’s press release about the deal. Prior to the deal’s announcement, there were speculations about Berkshire potentially providing financial support, given its involvement in the $55 billion acquisition of Anadarko Petroleum in 2019. During that transaction, Berkshire purchased $10 billion of Occidental’s 8% preferred shares and obtained equity warrants as well.
Berkshire Hathaway’s Deal with Occidental Petroleum Raises Questions
Berkshire Hathaway’s recent announcement regarding its deal with Occidental Petroleum has left many wondering why the company didn’t mention its participation in the $1.7 billion common equity financing plan that Occidental has put forward to support the deal. By committing to purchase 25% of the equity raise, Berkshire Hathaway would have shown its support for Occidental’s CEO Hollub. However, this decision raises questions about Berkshire’s level of support.
Despite the investment, Wall Street hasn’t responded positively to the CrownRock deal. Occidental’s stock has fallen approximately 7% since rumors of the transaction surfaced in late November. Although there was a slight increase in the stock price on Wednesday as oil prices fell, it is still trading at a new 52-week low.
The CrownRock deal is seen as costly, and Occidental is assuming a considerable financial risk by relying heavily on debt to finance the transaction. In contrast, Exxon Mobil and Chevron, with larger merger deals, have chosen to use equity. Furthermore, Occidental already has a highly leveraged balance sheet, and the debt will rise to $28 billion after the completion of the deal, before any planned asset sales take place.
Analysts have expressed concerns about the deal’s impact on Occidental’s net asset value and stock price. Mizuho analyst Nitin Kumar has revised his target stock price down to $72 from $76, citing the “modest dilutive” effect it will have on the company’s net asset value. He also highlights the bold move of financing 86% of the deal with debt, especially considering a potentially weak macroeconomic outlook in 2024.
Raymond James analyst John Freeman shares similar sentiments, calling the price of the deal “steep.” He has lowered his target stock price to $70 from $84 due to lower oil prices but maintains a Strong Buy rating on the shares.
With West Texas Intermediate crude currently valued at $69.25 per barrel, it suggests a significant decline from September’s price of over $90 per barrel. This decline may further impact the profitability of Occidental’s investment.
Many are now eagerly awaiting a filing by Berkshire Hathaway concerning its involvement with Occidental. If no such filing occurs, it may indicate that Buffett is not fully confident in Hollub’s deal.