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Why Ordinary Retail Investors Should Not Buy Buffett's Occidental Petroleum

Thoughts on why the highly leveraged oil company is less desirable compared to a stalwart Big Oil company

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Mark Yu
Mar 09, 2020
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The energy sector has been punished the most compared to other industries so far this year. Shrinking demand is coming from the world's largest oil consumer, China, amidst its fight against the coronavirus. The bountiful supply of oil coming from the world's new leading producer, the U.S., in addition to the disagreements of oil output reduction in the joint coalition of OPEC and Russia and other nine countries (also known as OPEC+) have led to the inevitable decline of oil prices. As a result, value and dividend yields have soared for oil companies as prices tank to new lows.

So far this year, the S&P Energy sector has lost 30% of its value compared to the broader market S&P 500's 8% drop. Among the biggest losers are the Big Oil companies. Exxon Mobil (

XOM, Financial) is down 32%, Royal Dutch Shell (RDS.A, Financial) is down 29% and Chevron (CVX, Financial) is down 21%. Meanwhile, a contender that has Warren Buffett  (TradesPortfolio)'s backing is Occidental Petroleum (OXY, Financial), which is down 35%.

It was nearly a year ago when Occidental Petroleum sealed a $10 billion deal with Buffett in order to facilitate its acquisition of a competitor for a whopping $38 billion. The $10 billion deal gave Berkshire Hathaway (

BRK.A, Financial)(BRK.B, Financial) rights to an 8% dividend yielding on preferred shares. The 8% per annum preferred shares were giving out yields far higher than Occidental's 5% ordinary dividend yield and the 4% on its term debt agreements. It did not take long before another famed investor,  Carl Icahn (Trades, Portfolio), voiced his criticism of the deal:

“Buffett figuratively took her [CEO Vicki Hollub] to the cleaners. The Buffett deal was like taking candy from a baby and amazingly she even thanked him publicly for it!

But you can’t blame Warren, if Hollub was arrogant enough to negotiate a deal with Buffett of this magnitude despite her admittedly limited experience in M&A and the Board was misguided enough to rubber stamp it, then one might say in Warren’s defense that it was almost his fiduciary duty to Berkshire Hathaway to accept it.”

It has been two quarters since Occidental's takeover of Anadarko, and the growing debt pile the company took on for the acquisition along with an earnings miss makes the company a little less desirable to invest in despite the growing presence of Berkshire's money in the company. Occidental delivered $985 million in losses in 2019, compared to $4.1 billion in 2018. The company had a net debt of $35 billion with $34 billion in book value.

Brought by marked reduction in its stock value, Occidental now has a trailing dividend yield of 11.8% with a negligible payout ratio--the company paid out $2.6 billion in dividends last year while having nearly a billion dollar in losses.

In comparison, Exxon Mobil (

XOM, Financial) also delivered an earnings miss in 2019. The company made 30% less in profits, or $14 billion, compared to its year-ago performance, while having $35 billion in net debt with $198.5 billion in equity.

Exxon has a trailing dividend yield of 7.3%--its highest ever--with a payout ratio of 92% as the company paid out $13 billion in dividends while making $14 billion in profits in 2019.

To boot, Exxon has been steadily raising its dividend payouts for the past 37 years and remains committed in doing so as of last week, while Occidental has been able to provide consistent payouts to its shareholders for the past 17 years--a length of time not to be taken for granted in this comparison.

Nonetheless, dividend-seeking investors may still rather pick Exxon over Occidental just by looking at these financial data rather than investing in the latter, who is still figuring things out following its gigantic acquisition and amid the recent Arab-Russian oil output disagreement.

It is also worth mentioning that Berkshire has increased its investment in Occidental's ordinary shares by nearly three times to $780 million in its previous quarter at an average estimated price of $41 a share compared to last Friday's price of $26.86.

Disclosure: Long Exxon Mobil and Berkshire Hathaway.

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