Warren Buffett's Occidental Play Looks Familiar
April 30 2019 - 7:47PM
Dow Jones News
By Nicole Friedman
Berkshire Hathaway Inc.'s investment in Occidental Petroleum
Corp. is straight out of Warren Buffett's playbook.
On Tuesday, the billionaire investor's firm agreed to inject $10
billion into Occidental's bid to acquire Anadarko Petroleum Corp.
Berkshire will get preferred Occidental shares if a deal goes
through.
The Berkshire investment could help Occidental stave off a rival
bid for Anadarko from Chevron Corp.
Mr. Buffett, Berkshire's chairman and chief executive, has long
struck such preferred-share deals, offering cash to companies that
need it in exchange for generous dividends and his seal of
approval. During and after the financial crisis, Berkshire acted as
a lender of last resort for blue-chip companies including Goldman
Sachs Group Inc., General Electric Co. and Bank of America
Corp.
The Berkshire-Occidental deal is Berkshire's biggest-ever
purchase of preferred shares, and it has a similar structure to
some of Berkshire's past deals.
If Occidental's proposed acquisition of Anadarko goes through,
Berkshire will receive 100,000 preferred shares in Occidental that
pay an 8% annual dividend and a warrant to purchase $5 billion in
Occidental common stock.
The deal's terms are favorable to Berkshire. Occidental can't
choose to redeem the preferred shares for a decade. The warrants,
which give Berkshire the right to buy 80 million shares for $62.50
each, can be exercised at any point, up to a year after the
preferred shares are redeemed.
Occidental stock fell 2.1% to $58.88 on Tuesday.
Berkshire declined to comment on the deal, but Mr. Buffett will
likely be asked about it at Berkshire's annual meeting Saturday in
Omaha, Neb. The meeting is expected to be attended by tens of
thousands and watched online by many more.
The firm has struggled in recent years to find ways to invest
its growing cash pile. It hasn't done a major acquisition since
2016, and the Occidental deal is its first preferred-share purchase
since 2014.
Berkshire held almost $112 billion in cash at year-end, and Mr.
Buffett said in an annual letter to shareholders released in
February that "prices are sky-high for businesses possessing decent
long-term prospects."
The firm isn't invested in any other U.S. oil producers. It
holds stakes in refiner Phillips 66 Co. and Canadian oil producer
Suncor Energy Inc., according to the most recent data available.
Berkshire bought a stake in Exxon Mobil Corp. in 2013, but it sold
that holding the following year.
Berkshire has had mixed luck with oil investments.
In 2008, Mr. Buffett bought ConocoPhillips stock when oil prices
were at a high, shortly before they swooned. "The terrible timing
of my purchase has cost Berkshire several billion dollars," he
wrote in his 2008 letter to shareholders.
At the 2015 annual meeting, however, Mr. Buffett said Berkshire
ultimately made a small profit on the ConocoPhillips
investment.
"We will not be buying, very often, oil and gas stocks, but we
will -- we probably haven't bought the last one," he said. "We have
not distinguished ourselves, at all, in the oil and gas field,
although we've made a little money, and we passed up one or two
where we could have made a lot of money."
Mr. Buffett and Occidental have some shared history.
Mr. Buffett's first stock purchase was three shares of Cities
Service preferred stock when he was 11 years old. Occidental's
chief executive, Vicki Hollub, started her career at Cities
Service, which was later acquired by Occidental. Cities Service is
now called CITGO Petroleum Corp. and owned by Venezuela's PetrĂ³leos
de Venezuela SA.
Write to Nicole Friedman at nicole.friedman@wsj.com
(END) Dow Jones Newswires
April 30, 2019 19:32 ET (23:32 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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