Berkshire Hathaway on Friday won approval from the US energy regulator to buy up to 50 percent of Occidental Petroleum, giving Warren Buffett’s company the ability to significantly increase its stake in one of the largest oil producers in the US industry.
The Federal Energy Regulatory Commission said Berkshire’s proposal to increase its stake in the $60 billion oil company, filed last month, was “consistent with the public interest.” Berkshire has requested “authorization to acquire up to 50 percent” of Occidental, Ferc said.
The regulator considered the request because of the potential effects on Midwestern electricity markets. Occidental shares jumped 9.9 percent to $71.29 after Ferc submission.
Buffett’s support was instrumental in Occidental’s $55 billion takeover of Anadarko Petroleum in 2019. Occidental CEO 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 give it the right to buy up to 83.9 million Occidental shares.
But the transaction closed just months before the coronavirus pandemic hit oil prices, putting pressure on Occidental after it took on heavy debt to finance the Anadarko deal.
This year, Berkshire spent billions of dollars buying Occidental shares on the open market. His position in the company recently eclipsed 20 percent, prompting speculation that Berkshire could buy the business outright.
Berkshire has moved more aggressively this year to boost investments as its cash pile swelled and its bets on the energy industry stood out. Along with buying tens of millions of Occidental shares, Berkshire poured money into Chevron, which at the end of the second quarter ranked among the largest public investments worth about $24 billion.
Jim Shanahan, an analyst at Edward Jones, estimated that Berkshire would soon exercise warrants to buy 83.9 million shares, saving it more than $900 million based on Occidental’s current share price.
Berkshire did not respond to a request for comment.
An Occidental spokesman said Ferco’s approval was necessary for Berkshire to secure 50 percent of the producer’s common stock because it owns assets subject to Ferco’s regulation. The previous approval threshold was 25 percent, a level Berkshire was approaching.
Buffett has invested in energy companies, but for years he primarily targeted power companies and pipelines. The businesses were seen as a natural way for Berkshire to deploy the cash it generates, given the large capital projects they involve.
Anointing of Greg Abel as Buffett’s successor, he also fueled expectations of more energy investment as he worked his way up through Berkshire’s energy unit and worked on some of the company’s biggest deals in the sector.
Although the 2020 oil crash hit Occidental hard, forcing it to cut its dividend and curb drilling plans, it was one of the stars of the recovery as months of capital discipline and rising oil prices repaired its debt-laden balance sheet.
Occidental has also sought to reposition itself as one of the sector’s climate leaders, setting a goal of net zero emissions by 2050, including the products it sells, installing renewable energy facilities in Texas and proposing to increase carbon capture technology.
Its net zero strategy would also leave it in a “tax advantaged” position due to the tax credits available for carbon capture techniques in Inflation Reduction Act passed by Congress, said Paul Sankey, an oil analyst at Sankey Research.
“Buffett’s Oxy investment has been domestic so far,” said Andrew Gillick, strategist at Enverus consultancy. “Now he’s doubling down on a company that produces free cash flow from traditional oil and gas and will be a leader in the kind of carbon-reducing technology that the federal government supports.”