Big Bet on Occidental Could Be Another Buffett Mistake on Oil, Analyst Warns

© Reuters. Big Bet on Occidental Could Be Another Buffett's Mistake on Oil, Analyst Warns

By Senad Karaahmetovic

It was disclosed on Friday that Warren Buffett’s Berkshire Hathaway (NYSE:BRKa) has received permission from the Federal Energy Regulatory Commission (FERC) to buy up to 50% of shares in Occidental Petroleum (NYSE:OXY).

The WSJ reports today that Berkshire hasn’t informed OXY that it plans to acquire a controlling stake in the company. Still, Buffett is likely to have a major influence on OXY given that BRK is OXY’s largest shareholder as it owns a c.20.2% stake.

Moreover, Buffett’s company has warrants to purchase another 83.9 million common shares and 100,000 shares of preferred stock.

The WSJ report adds that some senior executives at Occidental believe Buffett may be interested in acquiring a controlling stake if oil prices fall, which should also bring down the OXY share price.

Occidental shares rallied almost 10% on Friday to push its market cap to over $66 billion. Shares closed at $71.29, already bringing hefty profits to Buffett as he was previously acquiring shares at a price in the range of $50 to $60.

A BofA analyst hiked the price target on OXY shares to $80 from $77 but warned that Warren Buffett may be bidding against himself by buying more OXY shares. If Buffett is simply bullish on oil prices, the analyst argues he has better options elsewhere given the run-up in OXY shares.

“Our standing position is that value isn’t enough to realize upside we look for catalysts to force recognition of value. BRK’s role as the ‘rate of change’ agent may have been overlooked but their disclosed interest may continue to squeeze short positions, recent outperformance may mean the risk from here is that BRK ends up bidding against itself,” the analyst wrote in a client note.

Finally, the analyst reminds clients of Buffett’s failed bet on ConocoPhillips (NYSE:COP) back in 2007, which was also based on the belief that oil prices would only increase over the long term.