Morningstar

Berkshire Hathaway: Occidental Deal Likely to be Funded by Redemption of Preferred Stock Holdings

Berkshire may be taking advantage of Occidental’s need to reduce its sizable debt load.

The Berkshire Hathaway Inc. is displayed on a smartphone screen.
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Securities in This Article
Occidental Petroleum Corp
(OXY)
Berkshire Hathaway Inc Class B
(BRK.B)

Key Morningstar Metrics for Berkshire Hathaway

Berkshire Hathaway BRK.B is reportedly in talks to buy Occidental Petroleum’s OXY petrochemical business, OxyChem, for $10 billion. We expect the insurer to swap its existing preferred stock holdings in the energy firm to fund the deal if it comes to fruition.

Why it matters: Berkshire may be taking advantage of Occidental’s need to reduce its sizable debt load—which stood at $22 billion at the end of the June quarter. This is a byproduct of Occidental’s use of debt (including preferred stock offerings) to fund its 2019 purchase of Anadarko Petroleum and 2024 acquisition of Crown Rock.

  • Over the past couple of years, Occidental has paid down more than $7 billion of debt using its own free cash flow, as well as asset sales, with the goal being to reduce its debt load to $15 billion on a net debt basis.
  • As part of its purchase of Anadarko, Occidental received $10 billion from Berkshire in exchange for 8% preferred stock, as well as warrants to acquire 83.9 million shares of Occidental’s common stock (at an exercise price of $62.50 a share), in exchange for Warren Buffett’s “seal of approval” for its deal.
  • We envision Berkshire swapping the preferred stock holdings for OxyChem while retaining the warrants, which are currently underwater, in the hopes that they become profitable over time.

The bottom line: While the expected purchase price for OxyChem of $10 billion looks slightly expensive based on expected pre-tax earnings of $850 million this year, it seems more reasonable relative to 2023 ($1.5 billion) and 2024 ($1.1 billion) earnings.

  • This would represent Berkshire’s largest deal since its 2021 purchase of Alleghany for $12 billion, but it would do little to reduce its growing cash hoard.
  • Our fair value estimate remains in place for Berkshire until we get more details on any transaction.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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