Berkshire’s Last Chemicals Deal Was a Bust. The OxyChem Purchase Looks Better.

An Occidental Chemical plant in Cincinnati. (Dreamstime)

Key Points

• Berkshire Hathaway’s 2011 acquisition of Lubrizol, a specialty-chemicals maker, has been unsuccessful, with revenues rising less than 20% to $6.4 billion since 2010.
• Lubrizol’s pretax profits remain unchanged at approximately $1 billion, and its value is not significantly higher than the $9.7 billion Berkshire paid.
• The chemicals industry has been challenging for over a decade, but Lubrizol has faced setbacks of its own.

While Berkshire Hathaway’s recent deal to buy Occidental Petroleum’s chemical business for $9.7 billion isn’t its first large purchase in the industry, it could be the first successful one.

The most recent prior deal—the 2011 acquisition of the specialty-chemicals maker Lubrizol —has turned out to be a bust. Lubrizol’s annual revenues have risen less than 20% to $6.4 billion since 2010, its last year as a public company. Pretax profits are unchanged at around $1 billion based on a Barron’s estimate of 2024 earnings.

Lubrizol probably isn’t worth much more than the $9.7 billion, including assumed debt, that Berkshire paid for the company.

The opportunity cost is significant. If Berkshire had used the money to buy an S&P 500 index fund when the Lubrizol deal was announced in March 2011, it would have more than $50 billion. The index has risen more than fivefold since then.

It shows that while Berkshire CEO Warren Buffett enjoys making deals—he continues to search for what he calls an elephant-sized transaction that could absorb a big chunk of the company’s $300-plus billion in cash—doing so successfully is tough. Even for Buffett, with his legendary business and financial acumen.

Lubrizol is one of several disappointing acquisitions made by Berkshire over the past 15 years. Also on the list are the 2013 purchase of H.J. Heinz (now part of Kraft Heinz) in 2013 and aircraft parts maker Precision Castparts in 2016. Winning deals over the past decade or so include the 2022 purchase of the insurer Alleghany.

Lubrizol gets about half its revenue from a longstanding additives business that includes products that enhance the performance of motor oil and other lubricants. The rest comes from a variety of specialty chemicals.

Buffett hailed the deal in 2011, saying in a news release that “Lubrizol is exactly the sort of partner with which we love to partner—a global leader in several market applications led by a talented CEO.”

At the time, it was one of Berkshire’s largest acquisitions. Lubrizol remains one of Berkshire’s 10 biggest subsidiaries, based on earnings.

Part of the problem is that the chemicals industry has been a tough place to invest for more than a decade. The stocks of sizable chemical companies such as LyondellBasell Industries and Eastman Chemical are below where they stood 10 years ago and not much higher than they were in 2011.

Additions to production capacity, particularly in China, have weighed on prices. And Lubrizol has been beset by its own issues, including fires at facilities in France and Illinois, in 2019 and in 2021 respectively, that hurt production and earnings. Lubrizol’s earnings were down about 50% in 2021, according to Berkshire’s 10-K report for that year.

Berkshire didn’t respond to a request for comment on the Lubrizol deal. The company “has a diverse portfolio serving dozens of markets and industries,” a Lubrizol spokeswoman noted.

“Our legacy additives business continues to account for more than 50% of our business, and we are seeing great growth potential in other categories like industrial, beauty and home, pharmaceuticals/nutraceuticals and medical.”

Berkshire doesn’t provide a lot of financial disclosure about Lubrizol and many of the smaller businesses in the $1 trillion market value conglomerate. It does provide quarterly revenue figures and percentage changes in pretax earnings for Lubrizol, but it rarely discloses the absolute level of earnings.

Barron’s estimated its 2024 profits by extrapolating from Lubrizol’s pretax earnings in 2020, the last time Berkshire disclosed them. In that year, the company earned about $1 billion before taxes. This year’s pretax earnings were down more than 15% through the first half.

The Occidental chemicals deal could turn out better for Berkshire than Lubrizol did. Berkshire is paying a reasonable 12 times projected 2025 pretax earnings for OxyChem. This could be the bottom of the cycle for chemical prices and demand, so profits could be poised to rise.

Maybe the second time will be the charm in chemicals for Berkshire.

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