History Tells Us That Warren Buffett's Oxy Decision Won't Be Rushed
Berkshire's slow-motion acquisition of BNSF 🚂 sheds some light on how Buffett might handle Occidental Petroleum
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Occidental Petroleum has had itself quite a year.
After getting crushed during the pandemic, Oxy capitalized on skyrocketing oil prices to pay down debt, re-grow its dividend, buy back shares, and invest in cutting-edge carbon capture technology.
Wall Street noticed.
Oxy ranks as the top-performing stock (up 121%) in the S&P 500 so far this year.
Warren Buffett noticed, too…
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As Buffett tells it, he read the transcript of Oxy’s earnings call on February 25, dove into the company’s 10-K, and found himself nodding along with CEO Vicki Hollub’s vision for the future.
“We started buying on Monday [February 28] and we bought all we could,” he later told CNBC.
Over the next six months, Berkshire Hathaway gradually amassed a stake of about 20.2% in the Texas-based oil giant. And that spurred plenty of speculation about just what Buffett has planned for his Oxy investment.
Does he intend to buy the whole company and add another energy asset to the Berkshire empire?
Or is he just scooping up undervalued shares during a cash-gushing oil boom?
Keep in mind: When Oxy needed $10 billion to acquire Anadarko in 2019, it was Berkshire that rode to the rescue. Buffett brokered a deal to buy 100,000 preferred shares of OXY 0.00%↑ that yield 8% annually, as well as warrants for 83 million more common shares at $59.62 a piece.
If exercised, Berkshire would own more than 27% of Occidental Petroleum.
(I bet Buffett is kicking himself for selling the Oxy shares received in lieu of cash dividends in 2020. In Q1 of that year, the cash-strapped oiler gave Berkshire 17.2 million shares — then valued at $200 million and now worth almost $1.2 billion — that Buffett promptly sold. Apparently, back then, he wasn't so confident in Oxy’s long-term outlook.)
This saga took another twist last month when Berkshire received official approval from the Federal Energy Regulatory Commission to purchase up to 50% of Oxy.
But, before the rumor mill even had a chance to start churning up idle gossip and uninformed speculation, the Wall Street Journal poured cold water over any talk of an imminent takeover.
But, if you actually read the article, that’s not really the case.
The Journal’s scoop comes from unnamed Oxy sources who told the reporters that Buffett has not yet informed Hollub and co. about any plans to bid on Oxy as a whole.
Newsworthy, but not quite as definitive as that headline suggests.
No one outside the Berkshire inner circle really knows what Buffett’s got planned for Occidental Petroleum.
Admitting that might not get a lot of clicks, but it’s the truth.
Nevertheless, it might prove valuable to look back at Berkshire’s past acquisitions in an effort to glean as many clues and connections as possible.
And, in this case, Berkshire’s Oxy activity most reminds me of the company’s slow-motion purchase of the Burlington Northern Santa Fe railroad more than a decade ago.
In 2007, Berkshire started buying shares of BNSF on the open market — and owned over 15% of the railroad by the end of that year.
According to the Traffic World trade journal (10/15/07), Buffett even sought government approval so that he could keep upping his stake:
Near the end of [August 2007], Buffett said in an SEC filing that he was notifying the Department of Justice’s antitrust division and the Federal Trade Commission that depending on market conditions he might want to buy more than 25% of BNSF shares, thereby triggering advance government notice and a 30-day review under antitrust law.
While waiting for that period to expire, Berkshire and related holdings bought call options that could be exercised for more stock shares once he cleared the review.
As of October 8, Buffett was still not close to piercing the 25% level, but having cleared the government review he is free to buy a lot more. The law does not require another such review unless his stake in BNSF approaches 50%.
Doesn’t this all sound a little familiar?
But — and here’s the rub — even after getting the governmental green light to buy up to 50% of BNSF, Berkshire added relatively little to its stake over the next two years. It didn’t cross 20% until early 2009 and, on February 3 of that year, still owned just 22.4% of the railroad.
And, then, all went quiet.
Nearly nine months passed before Buffett even broached the topic of a complete takeover with BNSF management — and even that turned out to be something of a spur of the moment decision.
In his latest annual letter, Buffett paid tribute to the late Paul Andrews of TTI and recounted how the acquisition of that company — and subsequent decision to hold a Berkshire board meeting in TTI’s hometown of Fort Worth, Texas — indirectly led to the BNSF deal.
In the fall of 2009, we consequently selected Fort Worth so that we could visit TTI. At that time, BNSF, which also had Fort Worth as its hometown, was the third-largest holding among our marketable equities. Despite that large stake, I had never visited the railroad’s headquarters.
Deb Bosanek, my assistant, scheduled our board’s opening dinner for October 22. Meanwhile, I arranged to arrive earlier that day to meet with Matt Rose, CEO of BNSF, whose accomplishments I had long admired. When I made the date, I had no idea that our get-together would coincide with BNSF’s third-quarter earnings report, which was released late on the 22nd.
The market reacted badly to the railroad’s results. The Great Recession was in full force in the third quarter, and BNSF’s earnings reflected that slump. The economic outlook was also bleak, and Wall Street wasn’t feeling friendly to railroads — or much else.
On the following day, I again got together with Matt and suggested that Berkshire would offer the railroad a better long-term home than it could expect as a public company. I also told him the maximum price that Berkshire would pay.
Matt relayed the offer to his directors and advisors. Eleven busy days later, Berkshire and BNSF announced a firm deal. And here I’ll venture a rare prediction: BNSF will be a key asset for Berkshire and our country a century from now.
The BNSF acquisition would never have happened if Paul Andrews hadn’t sized up Berkshire as the right home for TTI.
So, let’s summarize:
Buffett bought over 20% of BNSF via the open market (and options)
He applied for and received government approval to buy up to 50%
Then he did nothing until a serendipitous (and unrelated) visit to Fort Worth coincided with BNSF shares crashing after a bad earnings report
Berkshire didn’t shift into takeover mode immediately after crossing the 20% threshold or winning approval to go up to 50%. Instead, Buffett waited for the stars to align before making his move.
This was no overnight operation.
One final point of comparison: Early on, Buffett watchers astutely observed that he tends to buy Oxy stock hand over fist whenever the price dips below $60 — but stops abruptly once it rises above that line.
When news broke that FERC approved Berkshire to buy up to 50% of the oiler, OXY 0.00%↑ jumped nearly 10% and has spent much of the past two weeks trading above $70 per share.
So, has Oxy’s recent rise priced Berkshire out of a deal?
Especially when taking its history with BNSF into account.
Back then, a price of $80 per share for BNSF was just as much of a line of demarcation as $60 is for Oxy today. Buffett snapped up shares south of that number, but pulled back as soon as the price rose above it.
In all things, the man is disciplined and price-conscious.
But, when it came time to purchase BNSF outright, Buffett offered $100 per share. And agreed to (partially) pay with Berkshire stock. That’s not something he does lightly.
I guess that’s the control premium that investors are always banging on about.
Barring some unforeseen upheaval in the oil biz, Berkshire will have to pay more than $60 per share when (or if) it makes its move for full control. As the BNSF example shows, strict price limits adhered to when building a stake on the open market can be cast aside when push comes to shove.
This pretty much puts us back where we started. No one really knows what Buffett has planned for Oxy — beyond the fact that he likes to keep his options open and he now has the option to buy up to 50% of the oiler.
Anything beyond that seems premature.
But, hopefully, this little trip down memory lane puts this whole situation — and, especially, that WSJ headline — into better perspective.
Any claim that Buffett is “not expected to bid for control” of Occidental Petroleum — or even that a final decision has been made one way or the other — is jumping the gun.
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Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.