Warren Buffett's $9.7 billion acquisition of OxyChem from Occidental Petroleum was what you might call an interfamily negotiation. Buffett's biggest deal since 2021 and perhaps his last big deal as CEO of Berkshire Hathaway came with Berkshire's sixth-largest equity holding on the other side of the table.
Berkshire's latest disclosures show that it owned nearly 265 million shares of Occidental Petroleum at the end of Q2, giving Buffett a roughly 27% stake.
Berkshire Reboots OXY Buybacks
The deal's potential upside for Berkshire doesn't just lie in a potential rebound in profitability for OxyChem. Occidental Petroleum should also benefit from a transformed balance sheet thanks to the $9.7 billion all-cash purchase. Occidental said it will use $6.5 billion of that to pay down debt. That will open the door to an "opportunistic multiyear share repurchase program," Occidental said in a divestment presentation.
In addition to deleveraging, the deal will allow Occidental to "unlock" the low-cost resource opportunity it has been building in its oil and gas business for the past decade, CEO Vicki Hollub said in a statement.
The Warren Buffett 'Seal Of Approval'
Interestingly, the OxyChem deal price nearly matches the $10 billion that Berkshire Hathaway provided to Occidental for a 2019 acquisition of Anadarko Petroleum. Berkshire's financing for the Anadarko deal involved 8% preferred stock, according to a write-up by Morningstar senior equity analyst Greggory Warren. Occidental said it will continue to pay the 8% dividend to Berkshire until redemption of the preferred stock begins in August 2029.
Morningstar's Warren said that the reported $10 billion price "looks slightly expensive based on expected pretax earnings of $850 million this year" for OxyChem. However, that outlook is down from $1.5 billion in pretax earnings in 2023 and $1.1 billion in 2024.
Warren noted that Berkshire Hathaway, as part of its 2019 financing, also received warrants to acquire 83.9 million shares of Occidental common stock at an exercise price of $62.50 a share. That grant was "in exchange for Warren Buffett's 'seal of approval' for the Anadarko deal," Warren wrote.
BRKB, OXY Stock Action
At the moment, those warrants are well out of the money. OXY stock initially rose on news of the deal, but reversed 5.1% lower to 45.28.
Berkshire Hathaway stock dipped 0.9% to 497.30. Berkshire stock has been notching tight weekly closes in what could become a flat base formation. The Sept. 5 high of 507.66 would be the base's buy point, if the stock remains below that level through Friday's session.
A move above 503.78 could present an early entry for aggressive investors.
After terms of the deal were released, Roth Capital raised its OXY stock price target to 46 from 45, keeping a neutral rating. The analyst noted that the price tag was slightly below the $10 billion in news reports.
BRKB stock has a 21-day average true range (ATR) of 1.21%. The average true range, available on IBD MarketSurge, gauges the characteristic breadth of a stock's behavior. Stocks with a high ATR tend to make large price moves that can trigger sell rules. Stocks with lower ATRs tend to make more incremental moves.
With the S&P 500 and Nasdaq now in a power trend, investors can buy stocks with ATRs of up to 8%, though they should not be too concentrated in such stocks.
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