Occidental: Warren Buffett’s wobbly warrants may still fuel a full bid

Shares of Occidental Petroleum have appreciated nearly nine times since 2020 lows. Despite this, the warrants that legendary investor Warren Buffett owns in the oil driller, equivalent to under 10 per cent of the company, are barely in the money.

The post-pandemic rally in the value of energy assets has made Occidental a big winner. It took on heavy debts for a seemingly ill-timed $55bn buyout of rival Anadarko in 2019. That acquisition now looks smart thanks to soaring energy prices.

Buffett’s warrants came with a $10bn preferred stock investment he made in Occidental to help fund the acquisition. But he missed out on the trough-to-peak share price jump.

Occidental’s stock price is a mere 15 per cent higher than a warrant strike price set before shares tanked.

The Sage of Omaha may be playing a longer game. He has accumulated a fifth of the company, warrants aside. Last week, he received approval from US energy regulators to buy up to 50 per cent of the Occidental. It is the kind of whale he covets.

At its share price bottom, Occidental’s enterprise value of roughly $60bn was just 16 per cent in equity. The enterprise value has jumped to about $90bn. Equity value has risen by even more than that implies. Occidental has used cash flow to pay off debt. Its own calculations show two-thirds of the group’s current enterprise value can be ascribed to equity.

In its most recent quarter, Occidental generated a whopping $4bn in free cash flow. The company can now cut debt further to reclaim an investment grade rating, perhaps redeeming Buffett’s preferred stock, which pays an 8 per cent dividend. Or it can raise payouts.

Buffett has long been intrigued by big, essential businesses. Two of Berkshire Hathaway’s largest holdings include a railroad and a power utility. A full acquisition of Occidental would require a premium. Still, the company trades below its stock price pre-Anadarko. It still could meet Buffett’s requirement as a value play.