Berkshire Hathaway on Friday won the approval of a US energy regulator to buy up to 50 percent in Occidental Petroleum, giving Warren Buffett’s company the opportunity to massively increase its stake in one of the US oil industry’s most storied producers.
The Federal Energy Regulatory Commission said Berkshire’s proposal to increase its $60 billion stake in the $60 billion oil company, filed last month, “was in the public interest.” Berkshire had requested permission to acquire up to 50 percent of Occidental, Ferc said.
The regulator weighed in on the application because of the potential impact on Midwestern electricity markets. Shares of Occidental rose 9.9 percent to $71.29 after the Ferc filing.
Buffett’s backing was instrumental in Occidental’s $55 billion acquisition of Anadarko Petroleum in 2019. Occidental chief executive Vicki Hollub flew to Berkshire’s headquarters in Omaha, Nebraska, to secure a $10 billion financing package. to close the deal. Berkshire took preferred stock as part of the deal and received warrants that now entitle it to purchase up to 83.9 million common stock of Occidental.
But the transaction closed just months before the coronavirus pandemic hit oil prices, putting pressure on Occidental after it took on large debts to fund the Anadarko deal.
This year, Berkshire has spent billions of dollars buying shares of Occidental on the open market. His position in the company recently eclipsed 20 percent, sparking speculation that Berkshire might buy the company outright.
Berkshire has been more aggressive in ramping up investment this year as the cash stack has grown and bets on the energy industry stand out. In addition to purchasing tens of millions of shares of Occidental, Berkshire also put money into Chevron, which was one of the largest public investments at the end of the second quarter, worth about $24 billion.
Jim Shanahan, an analyst at Edward Jones, estimated that Berkshire would soon exercise the warrants to buy the 83.9 million shares, saving more than $900 million based on Occidental’s current stock price.
Berkshire did not respond to a request for comment.
An Occidental spokesperson said Ferc’s approval was necessary for Berkshire to secure 50 percent of the producer’s common stock because it held assets subject to Ferc’s regulations. The pre-approval threshold was 25 percent, a level approaching Berkshire.
Buffett has invested in energy companies, but has focused on electric utilities and pipelines for years. The companies are seen as a natural way for Berkshire to deploy the money it generates, given the large investment projects they involve.
Greg Abel’s appointment as Buffett’s successor has also raised expectations of increased energy investment as he rose through Berkshire’s energy unit and worked on some of the company’s bigger deals in the industry.
While the 2020 oil crash hit Occidental hard, forcing it to cut its dividend and rein in its drilling plans, it has been one of the stars of the recovery as months of capital discipline and rising oil prices have restored the debt-laden balance sheet.
Occidental has also sought to reposition itself as one of the industry’s leaders on climate, setting a target for net-zero emissions by 2050, including from the products it sells, installing renewable energy facilities in Texas and proposing to scale up carbon capture technology.
The net zero strategy would also leave it in a “tax advantage” because of tax credits available for carbon capture techniques in the Inflation Reduction Act passed by Congress, said Paul Sankey, an oil analyst with Sankey Research.
“Buffet’s Oxy investment has been a success so far,” said Andrew Gillick, a strategist at consulting firm Enverus. “Now he’s doubling down on a company that generates free cash flow from traditional oil and gas, and is poised to become a leader in the kind of carbon reduction technology the federal government supports.”