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Will Occidental Petroleum Be Buffett's Next Elephant?

The stock market managed to post some solid advances on Thursday, even as concerns about inflation and its potential to push the economy into a recession persist. After spending significant parts of the day in losing territory, the Dow Jones Industrial Average (DJINDICES: ^DJI) and S&P 500 (SNPINDEX: ^GSPC) managed to climb as much as 1%. Meanwhile, the Nasdaq Composite (NASDAQINDEX: ^IXIC) outperformed with even bigger gains.


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Data source: Yahoo! Finance.

One possible reason why investors are getting more upbeat could have to do with the price of oil, which has come down from its recent highs. Crude prices fell another $2 per barrel on Thursday, moving to around $104 per barrel, and oil's broader decline from the $120S has had a big impact on producers like Occidental Petroleum (NYSE: OXY).

Yet at least in Occidental's case, the interest that the company continues to see from Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) CEO Warren Buffett points to at least the possibility that the Omaha-based insurance giant could pick the exploration and production company as its next big elephant acquisition outright.

More Occidental shares for Buffett

Occidental stock didn't move much on Thursday, picking up about half a percent. Yet investors were still somewhat pleased to see Buffett and Berkshire becoming increasingly interested in the company.

Berkshire has a large-enough position in Occidental already that it has to report additional acquisitions to the U.S. Securities and Exchange Commission. That's exactly what Warren Buffett's company did late Wednesday, with its latest ownership filing showing that Berkshire picked up more than 9.55 million shares of the oil company. With that purchase, Berkshire now owns 152.7 million common shares of Occidental.

The price that Berkshire got was reasonably favorable, picking up Occidental stock at an average cost of between $55 and $56 per share. All told, Berkshire invested nearly $529 million, boosting its stake in Occidental's common shares to roughly 16.3%.

What would it take to go all out?

At some point, investors can reasonably wonder whether Buffett could simply decide to make the more aggressive move to purchase the rest of Occidental's stock and take full control of the company outright. Occidental's total market capitalization right now is roughly $54 billion, making the value of the stock Berkshire doesn't already own about $45 billion. However, Berkshire would have to offer a premium to take over the company fully, so it might take $60 billion or more to swallow Occidental whole -- not to mention assuming $35 billion in net debt.

It wouldn't be the first time that Berkshire has inched into making a major acquisition. At the time that the Buffett-led conglomerate announced that it would acquire railroad company Burlington Northern Santa Fe in 2009, Berkshire already owned about 22% of its outstanding shares. That acquisition has been highly successful for the insurance company, capitalizing on the rising need for efficient transportation as e-commerce rose in popularity.

However, Berkshire also has had substantial stakes in companies for a long time without moving any further. Healthcare-company Davita, finance bellwether American Express, and food industry leader Kraft Heinz are all examples of companies in which Berkshire has sizable stakes of around 20% or more. Berkshire hasn't made a greater overture toward complete ownership in any of those cases.

Buffett is a value investor, and there's a lot of apparent value in the oil patch right now. Much depends on where oil prices go, but based on its aggressive moves, Berkshire at least seems to think that neither a possible recession nor any possible end to geopolitical hostilities will make Occidental any less of a good long-term investment.

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American Express is an advertising partner of The Ascent, a Motley Fool company. Dan Caplinger has positions in Berkshire Hathaway (B shares). The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Kraft Heinz and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.


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