Warren Buffett’s close followers are celebrating his latest deal in his final quarter as Berkshire Hathaway CEO — and they tell Business Insider he may not be done yet.
Berkshire Hathaway said on Thursday that it would pay $9.7 billion in cash for Occidental Petroleum’s chemicals business, OxyChem: its biggest acquisition since it paid $12 billion for insurer Alleghany in 2022.
David Kass, a finance professor at the University of Maryland and longtime Buffett blogger, said the 7% slump in Occidental stock after news of the deal broke suggested Berkshire had secured “extremely favorable terms.”
That’s unsurprising given the two companies’ history. Berkshire originally gave Occidental $10 billion to help finance its $55 billion takeover of Anadarko Petroleum in 2019, in exchange for preferred stock and warrants. It began purchasing the oil company’s common stock in 2022, growing its ownership stake to 28% as of June this year. Berkshire and Occidental didn’t immediately respond to requests for comment from Business Insider.
Brett Gardner, an analyst and the author of “Buffett’s Early Investments,” said Berkshire acquiring OxyChem was a “win-win,” as Berkshire was getting a good price and Occidental would be able to bolster its balance sheet.
Occidental has accumulated debt in recent years thanks to its Anadarko deal and its purchase of rival Crown Rock last year. The oil producer and explorer said in the deal announcement that selling OxyChem would allow it to reduce debt by $6.5 billion and reach its target level of below $15 billion. In contrast, Berkshire was sitting on a record $344 billion cash pile at the end of June.
Kevin Dietsch via Getty Images
Alex Morris, the author of “Buffett and Munger Unscripted” and the founder of investment research service TSOH, said Berkshire was paying about eight times OxyChem’s trailing 10-year average pre-tax earnings of $1.2 billion — a “good price” if that trend holds.
He said Occidental CEO Vicki Hollub was likely selling OxyChem to Berkshire to pay off debt more quickly and resume stock buybacks. “My sense is shareholders want a cleaner story,” Morris said.
Related stories
Business Insider tells the innovative stories you want to know
Business Insider tells the innovative stories you want to know
Paul Lountzis, the president and founder of Lountzis Asset Management, called the OxyChem purchase a “solid deal” for Berkshire as it’s buying at “perhaps a low point in long-term earning power.”
Depressed oil prices have weighed on the chemicals industry in recent years. Occidental has projected OxyChem’s profits will fall to a five-year low of $850 million this year.
Lawrence Cunningham, the author of several books about Berkshire and the director of the University of Delaware’s Weinberg Center, said the transaction “reflects mutual long-term interests, not opportunism.”
Berkshire “needs Occidental to thrive” as a nearly one-third shareholder, Cunningham said. The deal secures a solid business for Buffett while also allowing Occidental to pay off debts and strengthen its operations, he added.
Buffett’s last hurrah?
Berkshire’s non-insurance chief, Greg Abel, is set to succeed Buffett as CEO at the end of this year. The legendary investor, who’s held that title since 1970, will stay on as chairman.
Kass called OxyChem a “fitting final deal” for Buffett, as he struck the 2019 financing agreement and made Occidental one of Berkshire’s largest holdings. He added that Buffett’s first stock purchase, at age 11, was Cities Service Preferred, an oil company that Occidental later acquired in 1982.
Gardner said Buffett still had time for a “surprise or two” before he steps down.
He added that, as CEO, Abel would likely collaborate with Buffett, especially during periods of turmoil as “Greg isn’t going to let the best capital allocator of all time sit on the sidelines if opportunities pop up.”
Abel might have final say on what Berkshire buys, Gardner said, but that “doesn’t mean the 95-year-old can’t be useful!”
Cunningham said the OxyChem purchase has some of the hallmarks of a Buffett deal — “simplicity, durability, and mutual benefit” — but it “really looks like Abel’s first” as this kind of carveout has “few precedents in Berkshire’s history.”
“That makes it the perfect bridge: classic Berkshire in substance, novel Berkshire in style,” Cunningham said. “The company is exquisitely in transition from Warren, investor par excellence, to Greg, operator par excellence.”
Lountzis said this would likely be Buffett’s final deal and Berkshire’s last for a while, given the difficulty of finding bargains big enough to move the needle at Berkshire, at a time of high asset values.
“There is too much dumb money out there, so sitting and waiting is fine with me,” he said.
John Longo, a finance professor, investment chief, and author of “Buffett’s Tips: A Guide to Financial Literacy and Life,” said Buffett was likely studying the proposed merger between Union Pacific and Norfolk Southern and, if he believes regulators will allow it, he might seek to merge Berkshire’s BNSF Railway with another national railroad.
“A deal of that size may end his tenure as CEO with an exclamation point,” Longo said.
