NEW YORK (BLOOMBERG, REUTERS) - Famed investor Warren Buffett is steadily snowballing a stake in Occidental Petroleum in what could end up being his biggest acquisition. His Berkshire Hathaway on Friday (Aug 19) won approval to buy as much as 50 per cent of the shares. Some investors believe it is a step towards a full takeover, which may end up costing more than US$50 billion (S$69.6 billion).
Occidental's share price soared 9.9 per cent, closing up US$6.41 at US$71.29, after the Federal Energy Regulatory Commission said letting Berkshire add to its 20.2 per cent stake was "consistent with the public interest".
Berkshire had applied to increase its stake on July 11, saying it would not hurt competition, undermine regulatory authority, or boost costs for consumers.
The share price of Houston-based Occidental has more than doubled this year, benefiting from rising oil prices following Russia's Feb 24 invasion of Ukraine. Berkshire began buying Occidental shares four days later.
Here is why Occidental is attractive to Berkshire:
Oil
Inflation looks to be the megatrend for the first half of the 2020s, and crude oil is one of the best natural hedges out there. Russia's invasion of Ukraine and a lack of investment in new oilfields over the past five years have hit supplies, leading to stagnant production profiles everywhere from Opec to US shale.
Meanwhile, demand for fossil fuels has been strong coming out of the Covid-19 pandemic even as governments push for a switch to clean energy.
With investments across the energy sector from utilities to solar power, Mr Buffett claims to be a realist in the debate around fossil fuels.
"People that are on the extremes of both sides are a little nuts," he said at a Berkshire shareholder meeting in 2021.
Cash
Too much cash has been Berkshire's biggest investing challenge over the past few years. The conglomerate had US$105 billion on hand at the end of June. It is expected to generate about US$8 billion in free cash flow each quarter for the next five years, according to Mr Greggory Warren of Morningstar Research Services. Inflation at the highest in 40 years is a great incentive to put that money to work.
Occidental would work better as a subsidiary of Berkshire than a stock holding "given the volatility that exists in the energy and commodity markets", Mr Warren said. "This could end up, though, evolving into a slow-motion takeover where Berkshire buys up to the stakes that the Federal Energy Regulatory Commission allows it to acquire until it can acquire Oxy whole."
Shale
Occidental is not only one of the biggest producers in the Permian Basin, the largest US oilfield, but it also has one of the lowest costs with an oil price of just US$40 a barrel needed to sustain its dividend. West Texas Intermediate currently trades at about US$90 a barrel.
Occidental chief executive Vicki Hollub has reined in the "drill, baby, drill" mentality that characterised shale for the first decade of its lifespan and is now prioritising profits over production. Free cash flow hit a record US$4.2 billion in the second quarter.
