Occidental Petroleum Corp. investors voted with their feet after the oil producer revealed a $10 billion deal with Warren Buffett’s Berkshire Hathaway Inc. to help finance its proposed purchase of Anadarko Petroleum Corp.
The stock dropped as much as 4.3 percent, the most since Occidental’s interest in Anadarko was first made public on April 12, and traded down 2 percent at 12:13 p.m. in New York. Chevron Corp., a rival bidder for Anadarko, was up 2.6 percent.
“We fear there’s an obsession by Oxy to get this deal done and sacrifice their shareholders along the way,” said David Katz, chief investment officer at Matrix Asset Advisors Inc., which manages $800 million including Occidental stock. “Today’s announcement is very frustrating. To give themselves additional firepower, they’ve got very expensive financing.”
Buffett’s pledge to invest in Occidental comes at a price: an 8 percent dividend each year for preferred stock. Berkshire Hathaway will also receive the option to buy 80 million more Occidental shares, about 10 percent of the company, at $62.50 a share, potentially further diluting existing shareholders.
Occidental’s agreement with Berkshire Hathaway comes as other oil producers pledge to limit capital spending and return cash to shareholders.
“The broad feedback from investors, at least in our view, is that this is an extremely expensive option,” Tudor Pickering Holt & Co. analyst Matthew Portillo said by telephone. “Investors are broadly asking management teams across the sector to de-risk their balances sheets.”
The annual cost of the preferred stock and the dilution of the warrants “will give shareholders pause,” said Oppenheimer & Co. Inc. analyst Timothy Rezvan. “I think it remains to be seen whether they can get half of shareholders to approve this.”
With Buffett’s backing, however, Occidental may seek to skirt a shareholder vote altogether.
“Depending on how they reshuffle the bid, there’s a chance that they avoid a shareholder vote on the Occidental side,” Katz said. “It seems like the CEO, with the board’s support, is going to do everything and anything to get the deal done.”