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Berkshire Taking a Long View on Occidental


Occidental Petroleum - OXY - Stock Price & News | The Motley Fool

Occidental Petroleum has a fascinating corporate history.

It is not at the top rank of oil companies -- it is for example now only the 9th largest petroleum producer in Texas. But it once served as the corporate vessel of the late Armand Hammer and it has seen more than its share of drama. Hammer ran the company from 1957 until his death in 1990.

The latest drama with regard to Oxy happens to involve a contemporary businessman who is nearly as notorious as was Hammer in his prime: Warren Buffett, via Buffett's corporate vessel, Berkshire Hathaway.

Until the coronavirus started freezing everything up, Occidental was in the midst of the acquisition of a smaller petroleum company, Anadarko. Berkshire was financing that transaction. As part of this deal, Berkshire received a lot of warrants (in effect stock options -- there is a distinction between warrants and options but not one pertinent just now).  So, Berkshire receive these stock options, yet they are nearly worthless as things stand.

The options have a "strike price" of $62.50 per share. That is. if the value of Occidental stock should get above that strike price within the life of these options, then  Berkshire shall have a right to buy Occidental at the number. If OXY stock goes to, say $80 a share, then the value of holding a warrant with a $62.50 strike price will be at that moment $17.50. That isn't calculus, it's just arithmetic.

Likewise, if OXY stock is at $62.50 a share or anything less, and a warrant must be exercised at this moment or it will expire, then the value of the warrant is plainly $0.

What is the value of OXY stock right now? As of the last time I checked (while writing these words) it was below $14. So Berkshire's interest in OXY via these warrants is, in the relevant jargon, "deep underwater."  Prince Namor deep.

But Berkshire has more than a decade to exercise the option. So it is obviously betting that OXY's price has a major upward move ahead of it in that decade, and presumably it believes the acquisition of Anadarko will aid in that.

I have to say I admire this combination of strategic acumen, a long time horizon, and optimism.


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