Buffett’s Occidental Bet That Infuriated Icahn Is Hit Hard by Oil Crash

But now, some 11 months later, Buffett’s bet on Occidental is suddenly a far cry from the slam dunk that it once appeared. Few large companies, if any, in the U.S. shale patch have been hit harder than Occidental by the collapse in oil prices this week. And while Buffett’s preferred shares don’t trade, the plunge in price on the company’s common stock, down 70% in the last 12 days, and in its benchmark bonds, down 25%, provide clues about the market’s perception of the value of his investment.

The stock dropped nearly 2% to $11.57 at 11:51 a.m. Thursday, after falling as low as $9.44 before trading was halted due to reaching a circuit breaker limit. It closed at $58.88 when Buffett invested last April.

For Buffett, the episode marks another setback for one of his key investments, just a year after the Kraft Heinz Co. writedown unleashed turmoil at that business. It also raises questions once again about how he intends to use his massive cash holdings — $128 billion at last blush — with few wholly appealing investment options to choose from.

The $10 billion investment in Occidental, his first major deal in four years, was instrumental in allowing the company to win a bidding war for Anadarko Petroleum Corp. But the transaction is only exacerbating Occidental’s troubles. Previously a steady, diversified oil producer, Occidental is now a heavily indebted shale oil producer highly subject to the whims of crude prices. Buffett himself conceded last year that the success of the deal depended on the vagaries of the oil market.

“The structure of the deal was a classic Berkshire deal,” Cathy Seifert, an analyst at CFRA Research, said. “Again, timing is everything and what a difference a year makes.”

Berkshire didn’t respond to requests for comment.

Things haven’t totally unraveled on Berkshire’s investment yet, of course. For now, in fact, the preferred shares continue to throw off cash — $200 million every quarter — and also rank above the common stock when it comes to liquidation. Berkshire does also hold some common shares, but they totaled just $780 million at the end of the year, equal to only 0.3% of Berkshire’s entire stock portfolio.

Buffett’s record of preferred stock deals have often played out in his favor. He bought stakes in General Electric Co. and Goldman Sachs Group Inc. during the financial crisis. Both of those preferred stakes paid 10% dividends.

But he’s been struggling to find attractive ways to put his near record cash pile to work. While his company has built up a more than $70 billion stock holding in Apple Inc. through the end of 2019, Buffett had failed to find major transactions since his 2016 acquisition of Precision Castparts Corp.

And while the Occidental deal was lauded by analysts at the time, it put Buffett in a notoriously volatile industry. Few predicted, of course, that a split between Russia and its one-time OPEC allies would spark a price war. The ensuing crash in those prices eventually forced Occidental to cut its dividend for the first time in three decades Tuesday. Berkshire’s preferred stake was unaffected by the cut, but Berkshire’s common stock holding will feel the ripple effects unless Buffett’s company tweaked that holding since the end of the year.

Buffett isn’t as concerned about a major shift in the long-term outlook for the business.

“I don’t think the secular demand will change that much,” Buffett said in a recent interview with Yahoo Finance. “But certainly the immediate demand has changed.”

Stock Surge

Cutting capital expenditure by a third and slashing the dividend almost 90% will help drive Occidental’s break-even costs down to the low $30 a barrel range, Chief Executive Officer Vicki Hollub said in a statement Tuesday. The move, and broader stock market gains, helped the company stock surge nearly 15% that day.

But the cut to Occidental’s prized dividend limits payouts to common stockholders, including Icahn, who has been battling the company for months over the Anadarko deal.

“Buffett figuratively took her to the cleaners,” Icahn wrote in July about Buffett’s preferred stock deal. Icahn, an Occidental shareholder, said in February ahead of the oil market crash that the “ill-advised bet” on Anadarko and any slump in oil prices could jeopardize the dividend.

Icahn said late Wednesday that he had increased his stake in Occidental to about 10%, from 2.5% previously, and he renewed his attack on the company’s board. “In other cultures, they would have the dignity to resign or worse,” Icahn said by phone. “In the army, they would be court-martialed, but here they would probably grant themselves bonuses because their stock options have collapsed.”

A representative for Occidental declined to comment on Icahn’s position.

In the short-term at least, the Anadarko deal has come at a major cost to shareholders. Occidental is down 82% since its interest in Anadarko first became public almost a year ago, compared to a 49% decline in the S&P 500 Energy Index, and a similar decline in oil.

Occidental’s dwindling market value has raised speculation over whether Buffett would ever buy the company outright. While Buffett has the funds, any eventual purchase would depend on his outlook for the oil market and other variables, said David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business.

“It’s certainly well within the $128 billion that Buffett has to spend,” Kass said. “But would the risks far outweigh the expected reward?”