Buffett's Berkshire Hathaway to invest $10 billion in Occidental Petroleum for Anadarko takeover

Key Points
  • Berkshire Hathaway has committed a $10 billion preferred stock investment in Occidental Petroleum.
  • The investment is contingent on the company completing its proposed takeover of Anadarko Petroleum.
  • Occidental is competing with Chevron to take control of Anadarko, which holds a significant position in the top U.S. shale oil field.
Cramer: The Anadarko acquisition is now Chevron vs. Buffett
Cramer: The Anadarko acquisition is now Chevron vs. Buffett

Warren Buffett is getting involved in a rare bidding war unfolding in the energy industry.

Berkshire Hathaway has committed a $10 billion preferred stock investment in Occidental Petroleum contingent on the company completing its proposed takeover of Anadarko Petroleum. Last week, Occidental made a rival bid for the oil and gas driller, challenging Chevron's $33 billion buyout of Anadarko.

Shares of Occidental fell 2% on Tuesday, while Chevron's stock popped 3%. A company's stock price often falls when investors believe it is about to acquire a company. Anadarko's shares fell about half a percent.

The capital injection from Berkshire could make Occidental a more formidable suitor. In pursuing Anadarko, Occidental is going toe to toe with an oil major with a much bigger balance sheet and whose market capitalization is nearly five times its value.

Several analysts initially downgraded shares of Occidental following its bid, with many saying the buyout would carry more risks than Chevron's proposed takeover of Anadarko. Achieving the benefits of the deal depends in part on Occidental's successful divestment in $10 billion-$15 billion in assets and achieving $3.5 billion in savings from the tie-up.

Berkshire's involvement suggests the company believes Occidental is best positioned to wring value out of Anadarko's portfolio. Occidental is focused on Anadarko's acreage in the Permian Basin, the U.S. shale oil region stretching across western Texas and southeastern New Mexico.

Occidental CEO Vicki Hollub has pitched Occidental as a high-performing Permian driller that can enrich Anadarko shareholders by squeezing more oil and gas from the drillers' wells at lower costs.

"We are thrilled to have Berkshire Hathaway's financial support of this exciting opportunity," Hollub said in a press release.

Here's how the Berkshire deal is structured:

  • Berkshire will receive 100,000 shares of cumulative perpetual preferred stock with a value of $100,000 a share.
  • The conglomerate also gets a warrant to purchase up to 80 million shares of Occidental at an exercise price of $62.50 a share.
  • The preferred stock will accrue dividends at 8% annually.

The Oracle of Omaha is an active investor across the energy sector.

Berkshire Hathaway is one of the top shareholders in oil refiner Phillips 66, and the firm took a new stake in Canadian oil and gas company Suncor earlier this year. Through Berkshire Hathaway Energy, Buffett has invested billions in natural gas power plants and pipelines, renewable energy and electric transmission and distribution.

Occidental has offered $76 a share for Anadarko, while Chevron's initial bid was $65 a share. On Monday, Anadarko restarted talks with Occidental after its board determined the offer could be superior to Chevron's bid.

Occidental CEO discusses the decision to make a formal bid for Anadarko
Occidental CEO discusses the decision to make a formal bid to buy Anadarko

"I think that in a psychological sense a seal of approval so to speak from Buffett may influence how Anadarko's board is thinking about it," said Pavel Molchanov, energy equity analyst at Raymond James.

"But financially, Occidental could have done this deal without this $10 billion dollars, so from a purely financial standpoint, it's not as credible. I still think that more likely than not Chevron will prevail in this bidding war," said Molchanov, who believes neither company should buy Anadarko.

The Berkshire investment helps Occidental with the cash component of the proposed acquisition, said Richard Tullis, energy equity analyst at Capitol One. Occidental's offer is structured as a 50-50 cash and stock deal.

However, Occidental's 8% annual payout to Berkshire is on the high end for an investment grade company, Tullis says. That could increase the combined company's forward debt metrics to a level above and beyond what investors had previously assumed.

"I think that's probably being reflected in the stock reaction today with the stock underperforming," he said.

The dividend payment is "a really sweet deal" for Buffett and a "very expensive piece of paper" for Occidental, said Michael Bradley, managing director for equity sales at investment bank Tudor Pickering Holt.

The market largely assumed that Chevron would put in a slightly higher bid this week and prevail in the battle for Anadarko, according to Bradley. However, the momentum now appears to be swinging in Occidental's favor, largely because Buffett's involvement allows the company to counter with an even higher offer, he said.

"Berkshire's behind them. [Buffett] has the brand name. He has the mystique, and I think that's probably what they need to bring them over the edge," Bradley said.

On Tuesday, Chevron reaffirmed its view that its "signed agreement with Anadarko provides the best value and the most certainty to Anadarko's shareholders." The energy giant would pocket a $1 billion breakup fee if Anadarko backs out of the agreement.