According to SEC filings, Berkshire invested another $44 million in the oil and gas company last week, bringing its stake to around $9 billion.
The conglomerate acquired 794,389 shares of the oil and gas company on June 23 for an average price of $55.40 each according to the 13D filing.
After this acquisition, the Omaha, Nebraska-based conglomerate owns 153.5 million shares of Occidental, a position worth 16.4% of the energy explorer and producer. However, the real underlying holding is much larger.
Berkshire also owns 100,000 preferred shares of Occidental, worth $10 billion, and 84 million stock warrants, given as part of a $10 billion financing for its merger with Anadarko Petroleum in 2019.
These warrants have an exercise price of $59.62, around Occidental‘s current trading price. If the shares climb above this price, Berkshire can use the warrants to buy more shares at a discount to the market value, substantially increasing its position in the oil explorer. If Buffett decides to execute these warrants, Berkshire would own around 25% of the oil company.
Based on these factors, I think this could be a precursor for an acquisition. Buffett clearly likes the company and the way it is being run, and he clearly thinks the equity has been undervalued (and remains undervalued if his recent purchases are anything to go on).
A business he knows well
During Berkshire‘s annual meeting in April, the Oracle of Omaha said that after he read Occidental‘s annual report, he decided it was a “good place to put Berkshire‘s money.” After all, this is a business he knows incredibly well after helping to fund the Anadarko deal. He also knows CEO Vicki Hollub well and clearly agrees with the strategy being used to run the business.
At the annual meeting, the guru also proclaimed the market had been treating Occidental’s shares as a sort of gambling chip, and this volatility has created an opportunity.
That is why I think there is potential for an acquisition here.
Public equity markets have been giving oil and gas companies the cold shoulder in recent years.
Environmental, social and governance concerns and general investor apathy toward the sector which has been subject to some pretty severe peaks and troughs over the past couple of decades are two factors that have weighed on market values and equity prices.
And now, companies are under pressure to refrain from increasing output in the face of higher prices.
Private company growth
If Berkshire bids for the rest of the company, it would not be the first long-term capital provider to take an oil company private this year.
At the beginning of June, shale oil baron Harold Hamm launched a bid to take his company, Continental Resources Inc. (CLR, Financial), private at $70 per share. The energy billionaire took the company public in 2007 and has frequently attacked Wall Street for placing a low value on the business. His family trust owns most of the company apart from the 17% in public hands.
“We have determined that the opportunity today is with private companies who have the freedom to operate and aren’t limited by public markets, similar to the way that we operated approximately 15 years ago,” Hamm explained soon after the plan was announced.
The CEO believes that as a private producer, the company will be able to increase production and reinforce its position at the top of the market without having to worry about other shareholder concerns and ESG considerations.
Therefore, I do not think it is too much of a stretch to suggest that Buffett could be considering the same approach.
After all, he has noted the market is not properly appreciating Occidental’s attractive qualities. With Berkshire's massive balance sheet behind it, the company would be able to increase output and spending without having to worry about the wrath of public investors.