The details and implications of this financial commitment were discussed in a Raymond James report.
In an April 30 research note, Raymond James analyst Pavel Molchanov reported that Warren Buffett's Berkshire Hathaway has committed to investing $10 billion in Occidental Petroleum Corp. (OXY:NYSE) if and when it successfully acquires Anadarko Petroleum Corp. (APC:NYSE).
With the $10 billion, Berkshire would purchase preferred stock in Occidental, which would carry an 8% coupon. This investment is "not cheap," Molchanov described and equated it $800 million of annual, not tax deductible, preferred dividend payments. Put another way, it amounts to about 14% of Raymond James' 2020 net income estimate for Occidental (excluding any Anadarko acquisition).
Molchanov highlighted that Buffett rarely invests in the energy sector, never mind in such a big way. His company's portfolio currently only contains two energy stocks, Phillips 66, which has a $1.1 billion market valuation, and Suncor Energy, which is valued at $356 million. Thus, added Molchanov, Berkshire's proposed Occidental stock purchase would be seven times larger than these two combined.
The analyst pointed out, too, that Occidental doesn't need Buffett's $10 billion to acquire Anadarko. The Texas-based oil and gas company could finance the deal solely by issuing common equity and debt.
Molchanov purported that Berkshire's $10 billion pledge could increase the chance Occidental wins the bidding war for Anadarko, only from a "psychology/sentiment sense," say if Anadarko's board considers it a stamp of approval of the deal.
Regardless, Raymond James remains bullish on Chevron Corp. (CVX:NYSE) winning the battle.
The financial services firm has a Strong Buy but no target price on Occidental. It is currently trading at around $57.48 per share.
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Disclosures from Raymond James, Occidental Petroleum Corp., April 30, 2019
ANALYST INFORMATION
Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.
The covering analyst and/or research associate owns shares of Chevron Corporation.
The analyst Pavel Molchanov, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.
RAYMOND JAMES RELATIONSHIP DISCLOSURES
Certain affiliates of the RJ Group expect to receive or intend to seek compensation for investment banking services from all companies under research coverage within the next three months.
Chevron Corp.: The covering analyst and/or research associate owns shares of the common stock of the issuer.
Raymond James & Associates, Inc. makes a market in the shares of Occidental Petroleum Corporation, Anadarko Petroleum Corporation and Chevron Corporation.
Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available here.