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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).
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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.
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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.