Business
Warren Buffett’s Berkshire Hathaway may have scored a ‘genius’ win-win in $10 billion acquisition that may be the last big deal of his career
The big move by Warren Buffett’s Berkshire Hathaway to buy the chemicals business of oil giant Occidental Petroleum for nearly $10 billion is a double win for Berkshire, analysts say, in Buffett’s potential swan song deal before retiring at the end of December.
The Oct. 2 deal is the first-ever Berkshire announcement that quotes incoming CEO Greg Abel and doesn’t mention the current chief executive by name.
The OxyChem business will operate as a strong standalone for Berkshire, while the deal should boost Berkshire’s nearly 30% ownership of parent Oxy because the Houston company will use the bulk of the proceeds to pay off the high debt load that’s dragged down its stock in recent years, said Doug Leggate, Wolfe Research energy analyst.
“It’s genius. It’s certainly a win-plus for Berkshire because it also helps the company that they own 30% of,” Leggate said. “It’s completely self-serving, it’s logical and—not in any nefarious way—definitely helpful.”
The $9.7 billion, all-cash OxyChem deal is Berkshire’s largest since scooping up insurance player Alleghany in 2022. In recent years, Berkshire has focused on selling off stakes of its investments and is sitting on a whopping mound of almost $350 billion in cash.
Leggate called OxyChem a steady, potential cash cow that focuses on its growing chlor-alkali business manufacturing PVC (polyvinyl chloride) resin for piping, construction materials, medical equipment, and more. Its business largely moves with the housing market, which could soon benefit more from falling interest rates. “It’s a low-volatile, uncontroversial, niche business that has pricing power given the market structure,” he said.
The 95-year-old Buffett announced his retirement plans in May, although Abel has long been tapped as his eventual successor (you can read Fortune‘s in-depth profile of Abel here).
Abel, the longtime Berkshire vice chairman of non-insurance operations, praised the OxyChem deal and Oxy CEO Vicki Hollub in the announcement.
“Berkshire is acquiring a robust portfolio of operating assets, supported by an accomplished team,” Abel said in the announcement. “We look forward to welcoming OxyChem as an operating subsidiary within Berkshire. We commend Vicki and the Occidental team for their commitment to Occidental’s long-term financial stability, as demonstrated by their plan to use proceeds to reinforce the company’s balance sheet.”
Berkshire did not immediately respond to interview requests.
Specifically, Oxy said it will use $6.5 billion of the proceeds to reduce debt and bring its principal debt below the $15 billion target it set following the late 2023 acquisition of Permian Basin oil producer CrownRock for $12 billion.
Hollub said the deal helps Oxy focus on its core oil and gas business, especially in the booming Permian, while strengthening its financial position through debt reduction.
OxyChem represents almost 20% of Oxy’s total pre-tax income, bringing in more than $1 billion annually.
The Berkshire-Oxy courtship
The intimate Berkshire-Oxy relationship dates back to 2019 when Oxy entered a dramatic bidding war with the much larger Chevron to acquire oil producer Anadarko Petroleum.
Anadarko had chosen to sell to Chevron when Oxy came back with a larger $38 billion offer that included much more cash—too good for Anadarko to turn down.
That offer only came to fruition when Hollub took a whirlwind trek to Omaha to see Warren Buffett and his Berkshire team. After a 90-minute meeting, Buffett committed $10 billion to finance the merger in exchange for preferred shares and a stake in the expanded Oxy.
The agreements allowed Oxy to boost its cash offer to about 80 percent of the purchase price in its successful David-versus-Goliath bidding war against Chevron.
Since then, Buffett has increased Berkshire’s stake in Oxy to more than 28%.
But, in the meantime, the big acquisitions left Oxy with a much greater debt load, especially going into the pandemic in 2020. Oxy barely survived the downturn, slashing its dividend from 79 cents per share each quarter down to just one penny. Since then, the dividend has risen back up to 24 cents—still much lower than 2019.
The OxyChem deal largely solves the debt problems, although Oxy won’t begin redeeming Berkshire’s preferred shares—and their 8% annual interest—until 2029.
“In a world where crude [pricing] is softening, Oxy has too much debt. It’s unequivocal that it’s a good thing for Oxy to raise cash and pay down debt,” said Dan Pickering, founder and chief investment officer for Pickering Energy Partners consulting and research firm.
While Abel may already be in the dealmaking driver’s seat for Berkshire, Pickering said, “[Buffett] was the driver of the original Oxy investment, so I’m sure he was involved.”
Pickering compared Berkshire’s likely double win for both OxyChem and Oxy a “circular loop” like the booming AI sector’s recent investments in each other. “AI is in a circular loop where Nvidia gives money to somebody, who gives money to somebody, who gives it back to Nvidia.”
The only problem for Oxy on Oct. 2 though was its stock surprisingly fell by 7%. Oxy had outperformed the S&P Oil & Gas Exploration & Production ETF by about 2.5% this week through Oct. 1, largely baking in the deal before the Oct. 2 announcement.
Oxy is selling its chemicals business at a bit of a discount when the broader petrochemical sector is near a cyclical trough.
Pickering said there was some “sell the news dynamic” at play. But the sale also diminishes some hopes that Berkshire would buy Oxy in its entirety, potentially hurting the stock.
“By buying these pieces, the odds that he’s going to buy it all have gone down,” Pickering said.
A year ago, this reporter asked Hollub at what point Berkshire might control too much Oxy stock. Her response: “We would never consider it to be too much.”
