Occidental
Petroleum has begun redeeming the 8% preferred stock it issued to
Berkshire Hathaway
in 2019, starting to rid itself of a high-cost source of financing, but Warren Buffett’s company is likely to continue to benefit from it for years.
According to Berkshire’s 10-Q report, issued Saturday in conjunction with its first-quarter profit report, the oil company paid off $474 million of the $10 billion total in March. Occidental (ticker: OXY) had telegraphed to investors that such an event could occur.
A rapid payback is unlikely because Occidental is governed by a formula in which half of any money available for dividends and buybacks beyond $4 a share a year goes to paying off the preferred stock at 110% of face value. The other half goes to additional returns of capital to Occidental common shareholders.
Occidental laid out the particulars as part of a presentation accompanying its fourth-quarter earnings release earlier this year. It likely will have more to say about the redemption on a conference call scheduled for Wednesday. Occidental is expected to report its results on Tuesday.
Berkshire Hathaway (BRK/A, BRK/B) originally got the $10 billion of preferred in the spring of 2019, when Occidental CEO Vicki Hollub was looking for quick financing in a bidding war with a deeper-pocketed
Chevron
(CVX) for Anadarko Petroleum. Occidental ended up winning.
At the time, the high rate—and warrants for Occidental stock—that Berkshire received came in for criticism from activist investor Carl
Icahn
as too generous to Berkshire. Icahn said that the “Buffett deal was like taking candy from a baby.”
The preferred deal looked like a loser for Berkshire when oil prices plunged in 2020 and shares of Occidental dropped under $10 a share. But with the recovery in oil prices and a sharp rise in Occidental’s earnings, the preferred has become an attractive holding for Berkshire.
Buffett addressed the preferred at Berkshire’s annual meeting Saturday, saying that while he was sorry to see part of the $10 billion holding be redeemed, he understood that it was the right financial move for Occidental. Berkshire also is getting paid off at a 10% premium to face value.
“We’d be disappointed in them if they didn’t reduce it, it’s intelligent from their standpoint,” Buffett said.
Berkshire is Occidental’s largest shareholder with a 24% stake worth about $12 billion. It also holds about 83 million warrants to buy Occidental stock exercisable at around $59 a share.
Buffett is a big fan of Hollub. He called her “an extraordinary manager” at the annual meeting and said Berkshire “loves” its holding in the company.
Buffett said at the meeting that Berkshire doesn’t want to control Occidental. Buffett volunteered that comment, saying there was speculation that Berkshire wanted to control the energy company. “We’re not going to buy control,” he said.
Berkshire’s Class A shares were up 1.1% Monday to $497,440, while Occidental was down 2.2% at $59.37. Part of the reason for the decline could be Buffett’s comment about not taking control of Occidental, given that the price may have reflected the possibility that Berkshire could bid for the whole company. Berkshire’s average cost for its Occidental stake is estimated to be in the low to mid 50s.
Write to Andrew Bary at andrew.bary@barrons.com
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