Warren Buffett’s Berkshire Hathaway was approved to buy Occidental Oil on Friday (19th)OXY-US), which some investors see as a key step in a full-scale merger, which may eventually total more than $50 billion. Why is Occidental Oil so attractive to Buffett? Bloomberg put together the following reasons for this.
crude
The general trend in the first half of the 2020s is undoubtedly the inflation issue sweeping countries around the world, and crude oil has therefore become one of the best natural hedging tools. At the same time, the demand for fossil fuels has continued to rise despite governments aggressively shifting to clean energy.
Buffett’s investment in the energy industry involves public utilities, solar energy and other fields. Although in recent years, with the rising awareness of environmental protection, all countries have actively developed green energy, but when it comes to fossil fuels, Buffett still considers himself a realist. When he focused too much on shareholder profitability over social issues such as climate change, he responded that companies should focus on creating shareholder value rather than investing in social causes related to climate change.
Familiarity
Buffett began investing in Occidental Petroleum in 2019, when the latter persuaded Buffett to invest $10 billion in the acquisition of Anadarko Oil (Anadarko) with Chevron. In the end, Occidental Petroleum successfully defeated Chevron and won Anadarko. Darko. In exchange, Buffett received an 8% dividend-yielding Occidental oil preferred stock, as well as common stock warrants.
At current stock prices, if Buffett executes the warrants, Berkshire will earn more than $900 million.
company value
The Anadarko deal was initially a disaster, as it left Occidental with more than $30 billion in debt. In addition, as the outbreak dragged down oil prices, Occidental Petroleum’s market value also collapsed from $50 billion before the deal was completed in 2019 to below $9 billion by the end of 2020.
From a different perspective, however, buying Occidental oil stocks still creates good value for Buffett, and with oil prices improving from late last year and buoyed by the Russian-Ukrainian war, Occidental is well positioned to become the leader of the year.S&P 500 Indexthe best-performing constituents. The S&P 500 has fallen 11% so far this year, while Occidental has risen more than 140%.
huge cash position
Excessive cash positions have long been Berkshire’s biggest investment challenge, with cash holdings of regarding $105 billion at the end of June. Morningstar stock analyst Greggory Warren estimates that Berkshire will generate an average of regarding $8 billion in free cash flow per quarter over the next five years. With inflation at a nearly 40-year high, Berkshire continues to grow. Rising cash flow is expected to play a huge role.
Given the volatility of energy or commodity markets, Occidental as a subsidiary is better than owning its stock, Warren argues. But he also said it might end up being an extremely slow acquisition process, with Berkshire having to keep getting approval from the Federal Energy Regulatory Commission (FERC) before taking Occidental outright.
Advantages of shale oil extraction
In addition to being the largest producer of crude oil in the Permian Basin, the largest oil field in the United States, Occidental Petroleum also has one of the lowest production costs, requiring only $40 per barrel of oil to allow it to pay dividends to shareholders. West Texas Intermediate (WTI) is currently trading at $90 a barrel.
While the cost of acquiring Anadarko was higher, it also significantly increased Occidental’s control of oil fields in the Permian Basin, bringing its holdings to 2.8 million acres, 14 times the size of New York City’s five boroughs combined. It also helps Occidental create more stable cash flow assets in the Gulf of Mexico and Algeria.
good relationship with senior management
Occidental CEO Vicki Hollub and Buffett’s relationship began with a meeting in Omaha in 2019. Buffett praised Holub following reading the transcript of Occidental’s late-February earnings call, in which he pledged to maintain financial discipline even as oil prices rose.
“I read every word, and that’s exactly what I want to do,” Buffett said on CNBC’s Squawk Box in March, expressing his appreciation for the way Holub runs.
Inflation Reduction Act
After President Joe Biden signed the inflation-cutting bill into law this week, the American Petroleum Institute criticized the $437 billion bill, which hinders necessary investment in oil and gas, as “the wrong policy at the wrong time” “.
Holub’s attitude was unexpectedly optimistic. Instead, she expressed a positive view of the above-mentioned bill. The reason may be related to the tax credit for carbon capture (Carbon Capture), because Western Oil plans to set up the world’s largest Direct Air Capture (DAC) Factories get a $180 tax credit for every ton of carbon dioxide they capture from the air.
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