Berkshire Hathaway is reportedly in negotiations to acquire the petrochemical division of Occidental Petroleum in a deal valued at approximately $10 billion. If finalized, this transaction would represent a significant strategic move for both companies, allowing Occidental to accelerate its debt reduction plans while enabling Berkshire Hathaway to deploy a substantial portion of its large cash reserve into a familiar industry.
Key Takeaways
- Berkshire Hathaway is reportedly discussing a $10 billion purchase of Occidental Petroleum's chemical business, known as OxyChem.
- The sale would help Occidental significantly reduce its net debt, which currently stands at around $22 billion.
- For Berkshire Hathaway, the acquisition would be its largest since 2022 and would utilize part of its extensive cash holdings.
- The deal deepens the existing financial relationship between the two companies, as Berkshire is already Occidental's largest shareholder.
Strategic Implications for Occidental Petroleum
Occidental Petroleum has been under considerable pressure to strengthen its balance sheet. The company is working to lower its net debt from approximately $22 billion to a more manageable target of $15 billion. A $10 billion sale of its chemical unit would allow Occidental to surpass this goal well ahead of schedule.
This debt burden is largely a result of two major acquisitions: the purchase of Anadarko Petroleum in 2019 and the more recent deal for CrownRock in late 2023. According to reports, Occidental has already managed to pay down $7.5 billion in debt over the past year through a combination of asset sales and operational cash flow.
Background on Occidental's Debt
The company's high leverage has been a primary concern for investors. A significant portion of this pressure comes from the preferred stock arrangement with Berkshire Hathaway, established in 2019 to help finance the Anadarko deal. This arrangement requires Occidental to pay more than $600 million in annual dividends to Berkshire, a substantial cash outflow that a reduced debt load could help mitigate.
The Debate Over the Sale
While the financial benefits of accelerated debt reduction are clear, not all analysts agree that selling the chemical business is the best long-term strategy for Occidental. Some experts view OxyChem as a valuable asset that provides diversification against the volatility of the oil and gas exploration and production sectors.
Roth Capital analyst Leo Mariani noted that most of Occidental's peers lack a similar diversifying asset. He also raised questions about the timing and price of the potential sale. Selling during a period of weak performance could potentially undervalue the business relative to its future earnings potential if and when market conditions improve.
However, the immediate priority for Occidental's CEO, Vicki Hollub, may be to create financial flexibility. A cleaner balance sheet would free up capital for share repurchases and further investment in core growth areas.
Berkshire Hathaway's Investment Rationale
For Warren Buffett and Berkshire Hathaway, the potential acquisition aligns with a long-standing investment philosophy: acquiring fundamentally sound businesses at a time when their short-term earnings are depressed. The petrochemical industry is cyclical, and the current period of weak profit margins presents an opportunity to buy at an attractive valuation.
OxyChem's Declining Profits
Occidental's own projections highlight the downturn in its chemical business. The unit is expected to generate approximately $850 million in pretax profits this year. This figure is a significant drop from the $1.1 billion earned in the previous year and the $1.5 billion recorded two years prior, illustrating the cyclical weakness that may make the asset attractive to a value investor like Buffett.
If the deal proceeds at the reported $10 billion price, it would be Berkshire's largest acquisition since its $13 billion purchase of insurer Alleghany in 2022. The move would also be a productive use of Berkshire's massive cash pile, which has grown to over $180 billion in recent quarters as Buffett has struggled to find large-scale deals at prices he considers reasonable.
Deepening an Existing Partnership
This transaction would further entrench Berkshire Hathaway's position within Occidental Petroleum. The conglomerate is already a major stakeholder with a significant investment portfolio in the energy company.
- Equity Stake: Berkshire owns a 27% equity stake in Occidental, valued at around $12 billion.
- Preferred Stock: It holds $8.5 billion in preferred stock that yields substantial annual dividends.
- Warrants: Berkshire also possesses warrants to purchase an additional 84 million shares at a price just under $60 per share.
Acquiring OxyChem would transform the relationship from a passive (though large) investment into a more direct operational ownership, integrating a key Occidental division into Berkshire's diverse portfolio of businesses.
Market Reaction and Analyst Outlook
Wall Street has maintained a cautious stance on Occidental Petroleum's stock, even with the prospect of a major debt reduction. The consensus rating among analysts is currently a 'Hold.'
An analysis of 17 recent ratings shows a clear trend:
- Hold Ratings: 14 analysts recommend holding the stock.
- Buy Ratings: 2 analysts suggest buying.
- Sell Ratings: 1 analyst advises selling.
The average 12-month price target for Occidental's stock (OXY) is approximately $50, which suggests a modest upside of only 5.8% from its current trading levels. This indicates that while the debt reduction is seen as a positive step, the market has broader concerns about the company's growth prospects or the valuation of its core assets.
Potential Next Steps
Details remain scarce on whether Occidental is conducting a broad auction for its chemical unit or engaging in exclusive negotiations with Berkshire Hathaway. Warren Buffett is well-known for his preference to avoid competitive bidding wars, often making straightforward, take-it-or-leave-it offers directly to companies.
This direct approach proved successful in the Alleghany acquisition. For Occidental, the decision will involve a critical trade-off: the immediate benefit of a fortified balance sheet versus the long-term loss of a diversified and cash-generative business unit. For Berkshire, the deal represents a classic Buffett-style opportunity to expand its industrial footprint with a quality asset during a market downturn.
