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Did Warren Buffett Contribute to Occidental Pete’s Demise?

Berkshire's $10 billion put Occidental over the top in its fight for Anadarko

The Motley Fool’s Travis Hoium recently suggested that Occidental Petroleum’s (NYSE:OXY) $55 billion acquisition of Anadarko Petroleum in 2019 could be one deal too many. With Chesapeake Energy (OTCMKTS:CHKPQ) recently entering Chapter 11, the spotlight has turned to Occidental. That’s terrible news for owners of OXY stock.

Now-Speculative OXY Stock Shows the Price of One Bad Business Decision
Source: Pavel Kapysh / Shutterstock.com

Before I get into why the Oracle of Omaha is indirectly related to the demise of Occidental, let’s consider where the company is, in relation to where Chesapeake was three years ago. That will tell us how close OXY is to Chapter 11. 

How Close is OXY to Bankruptcy

In April 2017, Chesapeake stock was trading at $6 a share, well below where it traded in 2011 when a barrel of West Texas Intermediate was trading for an average of $95. Today, that average is about 60% lower. 

In an April 2017 article about the company, I noted that Chesapeake had an Altman Z-Score of -2.25. Anything below 1.81 suggests a company is in distress and could go bankrupt in the next 24 months. 

It took Chesapeake a year longer but given a barrel was averaging $51 at the time and on the rise, and interest rates were relatively low, it makes sense that it was able to last until June 2020. In fact, in my 2017 piece, I illustrated how Chesapeake could avoid bankruptcy, but only if it were able to turn on the earnings tap. That didn’t happen. It lost $631 million in 2017, it made $133 million in 2018, and lost $416 million in 2019.

Ironically, here’s how I finished that 2017 article:

“My brand of investing is simple. Follow Warren Buffett’s lead. Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1,” I wrote. 

“Back in 2011, I suggested EOG Resources (NYSE:EOG) provided less risk to investors than CHK. Clearly, that hasn’t changed.”

Today, EOG’s Altman Z-Score is 2.48, while Occidental’s is 0.58, putting well under 1.81, the point at which a company enters the distress zone. Occidental is clearly in a similar position to where Chesapeake was three years ago. 

Warren Buffett and OXY Stock

For those unfamiliar with Buffett’s relationship with Occidental, his company lent OXY $10 billion last August to help it acquire Anadarko, beating out Chevron (NYSE:CVX) in the process. In hindsight, Chevron’s CEO has got to be ecstatic; it lost the fight. 

To complete the deal, Occidental took on almost $30 billion in debt, which doesn’t include Berkshire Hathaway’s (NYSE:BRK.A,NYSE:BRK.B) $10 billion.  

For the $10 billion, Buffett got 100,000 cumulative perpetual preferred shares that paid a dividend of 8%. He also got 80 million warrants to buy OXY stock at $62.50. As I write this, OXY is trading at a little over $18. 

Then, the novel coronavirus struck almost at the same time Russia and Saudi Arabia got in a short price war, which put all oil and gas companies in dire straights. Occidental cut its dividend to a penny a share in late May. To pay Buffett’s preferred share dividends, Oxy issued Berkshire 17.3 million shares of its stock to settle its quarterly interest payment. 

As a result of the share issue, Berkshire controls 97 million shares of OXY stock, which represents approximately 10.5% of its shares based on 917 million shares outstanding.

In the most recent quarter ended March 31, Occidental lost $2.2 billion, down significantly from a profit of $631 million a year earlier, before it made its fateful acquisition. 

Occidental could turn out to be one of Buffett’s worst moves, in a lengthy career that’s had many victories. His only hope to right wrong is to work with the company to sell itself to Chevron, who was prepared to pay $50 billion (enterprise value) for Anadarko only a year ago. 

Bottom Line on OXY Stock

At present, Occidental’s enterprise value is $64 billion. While the company is considering asset sales to lower its debt, there’s no guarantee it will.

Buffett didn’t have to get involved in the Occidental deal, but he did. Now Berkshire shareholders are paying the price. He owes it to them to get this mess cleaned up.

Whether Chevron is willing to play ball is an entirely different question.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/did-warren-buffett-contribute-to-occidental-petes-oxy-stock-demise/.

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