- Warren Buffett's Berkshire Hathaway invested another $250 million in Occidental Petroleum this week.
- Buffett's company now commands a 19.2% stake, valued at north of $10 billion.
- If Berkshire clears 20%, it can include a share of Occidental's profits in its own earnings.
Warren Buffett's Berkshire Hathaway plowed another $250 million into Occidental Petroleum this week, lifting its stake in the energy company to 19.2%.
The famed investor's conglomerate snapped up 4.3 million shares, paying about $58 per share on average, a SEC filing revealed on Wednesday. It now owns nearly 180 million shares of the oil-and-gas explorer and producer — a position worth $10.4 billion based on Occidental's closing price of $58.01 on Wednesday.
Buffett's company established a roughly 3% position in the first two months of this year, and has spent about $9 billion adding to it since then, mostly in the first half of March and during the past month. Berkshire is now approaching a 20% ownership stake, which would allow it to include a proportional share of Occidental's profits in its reported earnings.
Berkshire currently uses the "equity method" to account for its 20%-plus stakes in Kraft Heinz, Pilot, Berkadia, and other companies.
In addition to its common shares of Occidental, Berkshire owns $10 billion worth of preferred shares, which yield $800 million of dividends annually. It also holds stock warrants enabling it to buy another 83.9 million common shares at a fixed cost of $5 billion. It secured the preferred stock and warrants in exchange for providing $10 billion of financing for Occidental's merger with Anadarko Petroleum in 2019.
Shares of Occidental are currently trading less than $2 below the warrants' exercise price of $59.62. If they rise above that level, Berkshire has the option to exercise its warrants and either sell the resulting shares for a profit, or keep them and lift its stake in Occidental to about 26% — a big step towards acquiring the entire company.
Occidental's stock price more than doubled in the first five months of this year, as Russia's invasion of Ukraine disrupted the global energy market and drove up fuel prices. However, the energy company's shares have slumped by 7% over the past month. Buffett and his team may have restarted their purchases because they see the stock as a bargain once again.
Buffett warmed to Occidental after CEO Vicki Hollub laid out her plans for the company on a February earnings call. She pledged to improve production, slash debt, boost dividends, resume stock buybacks, and focus on growing free cash flow over the long term.
"What Vicki Hollub was saying made nothing but sense," Buffett proclaimed during Berkshire's annual shareholders' meeting in April. "I decided that it was a good place to put Berkshire's money," he said about Occidental.
Buffett noted Berkshire was able to rapidly build a 14% stake in Occidental in the spring due to manic trading of its shares at the time. Investors were treating the stock market like a casino, and some of America's largest companies like poker chips, he said.
"The whole country in March of this year was sitting around trading Occidental in some crazy way," Buffett said. "It defies anything that Charlie and I have seen, and we've seen a lot," he added, referring to Berkshire's vice-chairman and his right-hand man, Charlie Munger.