Buffett faces off against himself in Occidental carve-up

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favorite tales on this weekly e-newsletter.Sitting reverse Warren Buffett on the negotiating desk is usually a precarious place. However what if the famed investor is negotiating with himself? That’s the uncommon state of affairs that has arisen as debt-laden Occidental Petroleum sells its petrochemical unit, OxyChem, to Buffett’s Berkshire Hathaway for just below $10bn. Berkshire is aware of the enterprise nicely, for 2 causes. A few of its unnamed subsidiaries, per securities filings, buy OxyChem’s output. However Berkshire additionally owns simply over 1 / 4 of Occidental, a $12bn stake it began constructing early in 2022, in addition to securities he acquired even earlier. This newest deal can’t be understood with out factoring in that broader, tangled historical past.Six years in the past, Occidental chief government Vicki Hollub made a daring guess on oil costs when she determined to purchase rival Anadarko for $55bn. Buffett helped her do it, offering $10bn in most well-liked inventory that carried an 8 per cent dividend — in impact, fairness however with debtlike common funds. Moreover he obtained shares for a couple of tenth of the corporate within the type of warrants that, for now, stay out of the cash.In idea, Buffett might have merely swapped his 2019 most well-liked inventory for possession of OxyChem, as analysts at Morningstar had prompt. With $8.5bn of most well-liked shares excellent, the numbers are fairly shut. Hollub might need favoured that too, since Buffett’s paper prices Occidental greater than the post-tax 5 per cent it pays on its $20bn internet debt steadiness.As it’s, Buffett is as an alternative tapping Berkshire’s ample $200bn money stash. And Hollub is utilizing the proceeds to retire her firm’s conventional debt. In any case, had Buffett been keen to money in his most well-liked inventory, he might need demanded a less expensive worth for OxyChem.Whereas the 2019 deal financing phrases look savvy for Buffett, subsequent frequent inventory purchases in Occidental haven’t labored out so nicely. The driller’s shares are down a tenth this yr amid weak oil costs, and are barely increased than when Buffett began shopping for greater than three years in the past.This time, he’s shopping for at what seems like the underside of the market. OxyChem’s working revenue is forecast to be 60 per cent decrease this yr than in 2022. The likes of LyondellBasell and Huntsman, pure play chemical substances corporations, are down a minimum of 35 per cent this yr. Petrochemicals are extremely cyclical; Buffett will look shrewd when commodity costs inevitably snap again up.As for Occidental inventory, it could ultimately rally as nicely. However as Berkshire’s funding in client big Kraft Heinz confirmed, Buffett doesn’t at all times get it completely proper. Persevering with to clip an annual 8 per cent coupon on these most well-liked shares reveals that even in a less-than-splendid funding, he is aware of how one can get the higher finish of the cut price.sujeet.indap@ft.com