Warren Buffett's Latest Move Garners Praise and Speculation on Future Deals

As Warren Buffett's tenure as CEO of Berkshire Hathaway nears its end, his admirers are lauding his most recent acquisition, hinting it may not be his last big move. In the final months of his leadership, insiders remarked to Business Insider that Buffett might still pursue additional deals.

Berkshire Hathaway announced on Thursday an agreement to purchase Occidental Petroleum's chemical division, OxyChem, for $9.7 billion in cash. This marks the company's largest purchase since its $12 billion acquisition of Alleghany in 2022. According to David Kass, a finance professor and seasoned Buffett blogger, the subsequent 7% drop in Occidental's stock price implies Berkshire nabbed exceptionally attractive terms for the deal.

A Strategic Purchase

The historical connection between Berkshire and Occidental is well-noted. In 2019, Berkshire provided Occidental with a $10 billion financial support package to back its $55 billion acquisition of Anadarko Petroleum, receiving preferences in the form of stock and warrants. By 2022, Berkshire began buying common shares of Occidental, increasing its holdings to 28% by this June. Neither firm responded to immediate inquiries from Business Insider.

Brett Gardner, an investment analyst and the author of 'Buffett's Early Investments,' praised the OxyChem transaction as mutually beneficial. Berkshire, he noted, managed to secure a commendable deal, while Occidental aimed to improve its financial standing.

Occidental's Financial Reshuffle

Occidental has been saddled with debt, exacerbated by its past acquisitions, including the takeover of Crown Rock last year. The company announced that the OxyChem sale would enable it to slash debt by $6.5 billion, targeting a debt level under $15 billion. Meanwhile, Berkshire's cash reserves, recording an all-time high of $344 billion by the end of June, place it in a robust financial position.

Alex Morris, founder of TSOH and author of 'Buffett and Munger Unscripted,' remarked that Berkshire's payment, multiplying eight times OxyChem's ten-year average pre-tax earnings, was a wise price, contingent on the consistency of prevailing trends.

The Market Outlook

Paul Lountzis of Lountzis Asset Management echoed sentiments of a promising deal, viewing the current acquisition as Berkshire capitalizing on potentially subdued long-term earnings capacities. With oil prices exerting downward pressures on the chemical sector, Occidental anticipates OxyChem's profits will reach a five-year trough of $850 million this year.

Lawrence Cunningham, a researcher on Berkshire, portrayed the transaction as one driven by shared, enduring interests rather than mere opportunism, underscoring the importance of Occidental's success to Berkshire given its significant ownership stake.

The Transition Era at Berkshire

With Greg Abel poised to assume the role of CEO from Buffett later this year, the veteran investor will retain his position as chairman. Kass labeled the OxyChem acquisition as a suitable farewell deal for Buffett, referencing his early foray into the oil sector at age 11 with Cities Service Preferred, which Occidental later acquired.

Gardner suggested there's room for Buffett to surprise with another strategic move before he steps aside. He emphasized Abel's likely collaboration with Buffett in times of market instability, harnessing the seasoned investor's unparalleled expertise.

Cunningham remarked that while the arrangement embodies typical characteristics of Buffett's deals — simplicity and partnership — it appears to be Abel’s inaugural major move, hinting at a synthesis of Berkshire’s traditional approach and an innovative style.

Lountzis predicted this might be Buffett's last major deal for some time, citing the current challenge of identifying significant low-cost acquisitions amidst high market valuations. He expressed contentment with a cautious approach in the current economic environment.

John Longo, a finance professor, speculated on Buffett's interest in possibly merging Berkshire's BNSF Railway with another prominent railway company, contingent on regulatory approval, as a concluding impactful move during his CEO tenure.