Buffett Scores Win in Berkshire’s Deal for Occidental Chemicals Unit

Warren Buffett’s Berkshire Hathaway owns a 26% stake in Occidental Petroleum. (Brandon Bell/Getty Images)

Key Points

• Berkshire Hathaway agreed to acquire Occidental Petroleum’s chemical business for $9.7 billion
• Occidental Petroleum’s shares fell 7.1% following the announcement, reflecting investor disappointment with the all-cash deal and its tax implications.
• The sale helps Occidental reduce its net debt but eliminates a diversifying asset and incurs a significant $1.7 billion tax bite.

Score one for Warren Buffett at the expense of Occidental Petroleum CEO Vicki Hollub.

It looks like Buffett’s Berkshire Hathaway got the better of Occidental Petroleum in its purchase of the energy company’s chemical business for $9.7 billion in cash, announced earlier Thursday. Investors are expressing their displeasure with the Occidental move.

Occidental shares fell 7.1% to $44.32, against a 1% drop in the Energy Select Sector SPDR exchange-traded fund. Berkshire’s Class A shares were off 0.2% at $744,617.

Berkshire is paying a price for the petrochemical business that would be reasonable at any time, but could be a bargain because earnings in the sector are depressed this year. It could benefit from an upturn in the chemicals industry in the coming years.

Barron’s wrote Tuesday that the deal was shaping up as a win for Berkshire after The Wall Street Journal reported that Berkshire was near a deal to buy the Occidental chemicals unit for $10 billion. That call looks accurate.

The purchase price of $9.7 billion works out to about eight times the chemical business’s projected $1.2 billion in 2025 earnings before interest, taxes, depreciation and amortization.

For Occidental, the deal allows the company to accelerate its goal of reducing its net debt to $15 billion, but it comes at a cost. The chemical business was a differentiator and diversifier relative to other oil-and-gas companies.

And the all-cash deal will result in a sizable tax bite of about $1.7 billion, reducing the proceeds to around $8 billion. One benefit is a reduction of $350 million of annual interest expense for Occidental, but it will be losing the profits of the chemicals business.

Investors in Occidental may also have been disappointed that Berkshire didn’t use its Occidental preferred stock to pay for the deal.

Berkshire holds about $8.5 billion of the preferred. Using that as a currency could have eliminated any tax bill for Occidental, as well as getting rid of costly preferred shares, on which the energy company is paying an 8% annual dividend. It amounts to more than $600 million a year.

In a client note Thursday, Citi energy analyst Scott Gruber noted that the deal was anticipated but that Occidental stock still was down. “We believe there is disappointment that a) OXY appears to be selling the business at a ~6x multiple on run-rate EBITDA post expansion near the trough of the chemical cycle; and b) OXY did not swap the business for the $8.3B of 8% preferreds owned by Berkshire, which offered a greater cash benefit.”

Occidental has projected that OxyChem would have about $850 million of pretax profits this year, down from $1.1 billion in 2024 and $1.5 billion in 2023.

Berkshire CEO Buffett knows Occidental well. Berkshire holds a 26% equity stake now worth $12 billion that was purchased since 2022. It also has the preferred stock, bought in 2019 when Hollub was looking to raise a sizable amount of money quickly as Occidental battled Chevron to buy Anadarko Petroleum. Anadarko ended up in Occidental’s hands.

Occidental’s high net debt of about $22 billion—it will be reduced after the Berkshire deal is completed—has constrained the company’s financial flexibility. The company hasn’t been buying back stock.

The debt is a legacy of Hollub’s $55 billion deal for Anadarko in 2019 and her $12 billion purchase of energy producer Crown Rock in 2024. Both transactions were largely debt financed.

Occidental’s profits and those of its peers are now under pressure due to lower oil prices, helping to illustrate the risk of debt-financed deals in a cyclical business. Having to sell to reduce the burden of debt when earnings are down can force a company to settle for less in making deals.

It isn’t clear whether Occidental auctioned the chemicals business or negotiated solely with Berkshire. Occidental didn’t respond to a request for comment.

An auction could have helped Occidental investors to get the best possible price, but Berkshire as a practice doesn’t participate in corporate auctions.

Write to Andrew Bary at andrew.bary@barrons.com