Key Morningstar Metrics for Berkshire Hathaway
- Fair Value Estimate: $487.00
- Morningstar Rating: ★★★
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Low
Berkshire Hathaway BRK.B is reportedly in talks to buy Occidental Petroleum’s OXY petrochemical business, OxyChem, for $10 billion. We expect the insurer to swap its existing preferred stock holdings in the energy firm to fund the deal if it comes to fruition.
Why it matters: Berkshire may be taking advantage of Occidental’s need to reduce its sizable debt load—which stood at $22 billion at the end of the June quarter. This is a byproduct of Occidental’s use of debt (including preferred stock offerings) to fund its 2019 purchase of Anadarko Petroleum and 2024 acquisition of Crown Rock.
- Over the past couple of years, Occidental has paid down more than $7 billion of debt using its own free cash flow, as well as asset sales, with the goal being to reduce its debt load to $15 billion on a net debt basis.
- As part of its purchase of Anadarko, Occidental received $10 billion from Berkshire in exchange for 8% preferred stock, as well as warrants to acquire 83.9 million shares of Occidental’s common stock (at an exercise price of $62.50 a share), in exchange for Warren Buffett’s “seal of approval” for its deal.
- We envision Berkshire swapping the preferred stock holdings for OxyChem while retaining the warrants, which are currently underwater, in the hopes that they become profitable over time.
The bottom line: While the expected purchase price for OxyChem of $10 billion looks slightly expensive based on expected pre-tax earnings of $850 million this year, it seems more reasonable relative to 2023 ($1.5 billion) and 2024 ($1.1 billion) earnings.
- This would represent Berkshire’s largest deal since its 2021 purchase of Alleghany for $12 billion, but it would do little to reduce its growing cash hoard.
- Our fair value estimate remains in place for Berkshire until we get more details on any transaction.
