Warren Buffett Not Expected to Bid for Control of Occidental Following Stake Boost

Warren Buffett’s bid to increase his stake in Occidental Petroleum Corporation

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At least for now, a full takeover of the resurgent energy company by the widely-watched billionaire isn’t expected to work any further.

The Federal Energy Regulatory Commission said in a regulatory filing on Friday that Mr Buffett’s Berkshire Hathaway Inc.

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Permission was obtained to buy up to 50% of the shares of the driller. The news fueled speculation that Berkshire may be gearing up to acquire Occidental.

Analysts have said Occidental’s oil business will complement Berkshire’s existing energy holdings, which include utilities, natural gas and renewables. Mr. Buffett has a warm relationship with Chief Executive Vicki Holb and has publicly praised his efforts to turn the company around after the acquisition of Anadarko Petroleum Corp., and his plans to pay down debt and increase dividend payments.

But according to people familiar with the matter, Mr. Buffett has not informed Occidental about any plans to acquire a controlling stake in the company. Given Mr Buffett’s well-known opposition to making hostile deals, it would be out of character for him to bid without first informing the company’s executives and directors.

Owning such a large stake—Berkshire is Occidental’s largest shareholder—gives him a huge influence over the company already, and gaining control could cost him a hefty premium to the current share price. Up nearly 10% on the news, the stock closed Friday at $71.29, giving the company a market capitalization of about $66 billion.

Then why would Berkshire ask permission to buy more of Occidental?

For one, it was close to running up against the investment limits imposed by FERC.

Filings show Berkshire currently holds a 20% stake in Occidental. It also has warrants to buy another 83.9 million common shares and 100,000 shares of preferred stock that pay a hefty dividend — both acquired after helping Occidental Finance with its 2019 acquisition of Anadarko.

Had Berkshire exercised the warrant, its stake would have risen to about 27%. This would have exceeded FERC’s permitted 25% limit before Friday’s decision.

“This is not a company that is going to raise the hackles of regulators,” said Cathy Seifert, an analyst at CFRA Research.

It should also give Berkshire breathing room in the case of a share buyback or other company move, which reduces the amount of shares outstanding, thus increasing its percentage stake.

There are other reasons to doubt Occidental’s Berkshire acquisition.

One of them is Price, according to the University of Maryland’s Robert H. David Kaas, professor of finance at the Smith School of Business.

So far, Berkshire has bought almost all of its Occidental shares at prices between $50 and $60, Mr. Kass said. According to the filing, Berkshire’s highest price was $60.37 in July.

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, Kass said. Shares are up 146% for the year, boosted by the rally in the oil price, compared to a 11% drop for the S&P 500.

People familiar with Occidental’s deliberations said the company’s leadership believes Mr. Buffett might consider making an offer if oil prices fall, bringing down Occidental’s share price. If Mr. Buffett makes an offer that the company considers fair, most of Occidental’s board would approve it to be presented to shareholders, one of the people said.

Mr. Buffett did not respond to a request for comment. An Occidental spokesperson declined to comment.

Mr. Buffett is currently represented as a passive shareholder in Occidental, based on a so-called 13G filing he has on record with the US Securities and Exchange Commission. If he wants to change his intentions and have a meaningful discussion with the company about the full acquisition, he will need to convert his filing to 13D, which is required by large shareholders who are actively involved in running. intend to be. company.

Taxes may also play a role in Mr. Buffett’s bid for a sizable minority stake in Occidental. Corporations with at least a 20% stake in another company can deduct 65% of the dividends received from the standard 50%.

Berkshire’s 20% stake also allows it to include a proportionate share of Occidental’s earnings in its own results. Based on analyst estimates of Occidental’s earnings, it could boost its earnings by several billions of dollars annually. Ahead of the most recent buy, revealed this month, Occidental fell below the 20% threshold for both gains.

Ever since Berkshire began buying Occidental shares in February, Mr. Buffett has had a friendly and cooperative relationship with Ms. Holb, and the pair talk regularly, according to people familiar with the matter.

When Mr. Buffett bought another slug of Occidental shares this spring, he called Ms. Holb to tell her about the transaction, according to one person. Ms Holub was driving at the time and proceeded to take the call, the person said.

Mr. Buffett’s message was simple: “Keep doing what you’re doing,” he told Ms. Holb.

Berkshire’s growing relationship with Occidental has an unexpected connection to Mr. Buffett’s early days of investing.

In 1942 at age 11, Mr. Buffett made his first investment: three shares of Citi Service’s preferred stock. Forty years later, Occidental acquired the oil company, which Ms. Holb had joined just a year earlier.

Mr. Buffett’s investment in Occidental this year shows that his first stock purchase is “coming full circle after 80 years,” Mr. Kass said.

write to Akane Otani at akane.otani@wsj.com, Christopher M. Matthews at christopher.matthews@wsj.com and Cara Lombardo at cara.lombardo@wsj.com

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