Berkshire Hathaway on Friday received approval from a US energy regulator to buy up to 50 percent of Occidental Petroleum, giving Warren Buffett’s company an option to significantly increase its stake in one of the US oil industry’s most famous producers.
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 applied for “permission to acquire up to 50 percent” of Occidental, Ferc said.
The regulator has weighed the motion because of its potential impact on Midwest electric power markets. Occidental’s shares rose 9.9 percent to $71.29 after the Ferc filing.
Buffett’s endorsement was instrumental in Occidental’s $55 billion acquisition of Anadarko Petroleum in 2019. Occidental CEO Vicki Hollub flew to Berkshire’s headquarters in Omaha, Nebraska, to secure a $10 billion funding package to close the deal. Berkshire acquired preferred stock as part of the transaction and received warrants entitling it to purchase up to 83.9 million shares of Occidental common stock.
But the deal was completed just months before the coronavirus pandemic hit oil prices, adding pressure on Occidental after it borrowed heavily to fund the Anadarko deal.
This year, Berkshire spent billions of dollars buying Occidental stock on the open market. His position at the company recently eclipsed 20 percent, leading to speculation that Berkshire could buy the company outright.
Berkshire has been more aggressive to increase investments this year as its cash stack has swollen and its bets on the energy sector have attracted attention. In addition to buying tens of millions of shares of Occidental, Berkshire has poured money into Chevron, which was among the largest public investments at the end of the second quarter, valued at about $24 billion.
Jim Shanahan, an analyst at Edward Jones, estimated that Berkshire would soon exercise the warrants to purchase the 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.
A spokesman for Occidental said Ferc’s approval was necessary for Berkshire to secure 50 percent of the producer’s common stock because it owns assets that are subject to Ferc’s regulation. The previous approval threshold was 25 percent, a level Berkshire is approaching.
Buffett has invested in energy companies, but for years his primary focus has been electric utilities and pipelines. Given the large capital projects they entail, the companies were seen as a natural way for Berkshire to use the money raised.
The appointment of Greg Abel to succeed Buffett has also fueled expectations for more energy investments as he rose through Berkshire’s energy division and worked on some of the company’s bigger deals in that sector.
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While the 2020 oil crash hit Occidental hard, forcing it to cut its dividend and curtail its drilling plans, it has been one of the stars of the recovery as months of capital discipline and rising oil prices repaired its indebted balance sheet.
Occidental has also sought to reposition itself as one of the industry leaders in climate by setting a goal of achieving net-zero emissions by 2050, including products it sells that install renewable energy systems in Texas and proposed the expansion of CO2 capture technology.
Its net-zero strategy would also put it in a “tax-deferred” position, as tax credits for carbon capture techniques are available in the Inflation Reduction Act passed by Congress, said Paul Sankey, an oil analyst at Sankey Research.
“Buffett’s Oxy investment has been a hit so far,” said Andrew Gillick, strategist at consulting firm Enverus. “Now it’s doubling down to 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 that the federal government is supporting.”