Occidental, facing substantial debt on its balance sheet, was motivated to sell OxyChem, especially as the chemical markets are currently at a low point in their cycle. Analysts at JPMorgan noted, “One of the key tradeoffs was timing, as OXY is selling OxyChem at below mid-cycle cyclical conditions for chemicals.” This timing could be crucial for both parties involved in the deal.
However, the market may not have fully anticipated a significant aspect of the transaction: Occidental will retain OxyChem’s environmental liabilities, which amount to $1.9 billion, as stated in its latest securities filing. Mizuho highlighted this risk, noting, “OXY is retaining ~$1.9 billion of environmental remediation liabilities (as of YE24), which is a risk to future cash flows if the actual cost of remediation exceeds the current assessed value.”
Additionally, Occidental will miss out on a projected cash flow boost from the expansion of OxyChem’s Battleground plant in 2026. JPMorgan estimates that this expansion could have increased Occidental’s cash flow by $460 million annually starting that year. When considering approximately $1.7 billion in tax leakage, the after-tax value of the sale is closer to $8 billion, according to their analysis.
The terms of the deal likely contributed to a more than 7% drop in Occidental’s shares on the day the acquisition was announced. Buffett’s involvement with Occidental dates back to 2019 when he played a pivotal role in financing Occidental’s acquisition of Anadarko Petroleum with a $10 billion commitment. In return, he received preferred shares and warrants to purchase additional common stock.
By early 2022, Buffett began acquiring Occidental’s common stock on the open market, ultimately securing a 28.2% stake by the end of June this year, making him the largest shareholder in the energy giant. Currently, Occidental pays an 8% dividend on Berkshire’s preferred stake and a 2.1% dividend yield on its common stock at prevailing prices, providing Buffett with substantial payouts even before the OxyChem acquisition.
Occidental’s CEO, Vicki Hollub, mentioned that as the company increases its cash reserves, it plans to start redeeming Berkshire’s preferred stock in 2029. This strategic move indicates a focus on strengthening the company’s financial position while navigating the complexities of the current market landscape.
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