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" Judging by both stocks’ price response (see the chart below) after the announcement of the deal, the market seems to feel little impact from the deal towards BRK but negatively towards OXY. In the remainder of this article, I will argue why I agree with the first part (i.e., I don’t see a substantial impact from the deal on BRK either) but disagree with the second part. I see the deal as a material catalyst for OXY. These considerations have led to a rating upgrade for OXY to buy from an earlier hold rating and a reiteration of my hold rating for BRK."



https://seekingalpha.com/article/4828134-oxychem-d...

for those who don't open the link,

" Other risks and final thoughts
Due to the above debt reduction, better strategic focus, and potential improvement in its capital allocation, I expect OXY’s earnings to grow at robust rates after the deal. The latest consensus projections seem to share the same view as seen in the chart below. To wit, its EPS is expected to suffer a setback in FY 2025 to $2.27, translating into a YoY decline of about 34%. But a robust recovery is expected after that. A minor increase to $2.29 is projected for FY 2026. For FY 2027 and 2028, the growth rates are projected to be 38.43% and 31.46% YOY, respectively. All told, in five years (i.e., by FY 2029), its EPS is forecast to reach $4.52, about doubling its 2025 level. In tandem, the forward P/E ratio is expected to decrease drastically over this period from the current reading of 19.75x to about 9.93x in 5 years.

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As for BRK, its following EPS projection serves as another reflection of the minimal impact of this deal. As seen, for FY 2025, its EPS estimate is $20.43, representing a small YoY decline of -7.12%. Following this, BRK’s EPS is expected to grow at a moderate pace for the next few years on average. For instance, its YOY growth for 2026 is estimated at 6.23%. All told, its EPS is forecasted to reach $23.88 in 5 years, translating into a cumulative EPS growth of about 16% in 5 years (or about 3% per year). There is nothing wrong to hold shares of BRK with a valuation of around 24x FY1 P/E considering its superb financial position, high-quality operation segments, and also highly diversified revenue streams.

The deal could certainly entail some potential downsides for OXY investors. For example, the price BRK paid for the deal could be below the fair value of what OxyChem is worth (and for BRK investors, whatever the discount – if any – would be too immaterial to move the needle). Also, in this deal, there is no transfer of environmental liabilities, thus such risks still remain with OXY shareholders after the deal. However, my verdict is that the positives far outweigh the negatives for the reasons argued above. In a nutshell, my thesis is that the OxyChem deal can help OXY to better focus and reinvest more than it can help BRK, which could catalyze a far better growth curve and valuation clarity ahead."

Hummmm….
” All told, its EPS is forecasted to reach $23.88 in 5 years, translating into a cumulative EPS growth of about 16% in 5 years (or about 3% per year).”
———————————-
Possible…….but seems a bit pessimistic relative to the 6% + inflation projected by other’s that I respect more on this board.

ciao

Possible…….but seems a bit pessimistic relative to the 6% + inflation projected by other’s that I respect more on this board.

EPS growth or book value growth of 6% + inflation?

Don't remember anyone predicting EPS growth.

" Possible…….but seems a bit pessimistic relative to the 6% + inflation projected by other’s that I respect more on this board."


Didn't several of, others that you respect more on this board sell, most everything American last year?

Does anybody know what fraction of Oxy's free cash flow came from Oxychem in a normal year when oil prices seem vaguely typical?
i.e., not this year, but a year or two ago

Jim

Does anybody know what fraction of Oxy's free cash flow came from Oxychem in a normal year when oil prices seem vaguely typical?
i.e., not this year, but a year or two ago

Jim, found a couple things that suggested it was about a quarter of Oxy’s earnings:


https://foundationsofenergy.substack.com/p/the-fin...

From AI:

“Strong profitability: Before the sale announcement, OxyChem was a highly profitable segment. A report published just before the deal estimated that OxyChem had generated over a quarter of Occidental's segment-level profit before tax over the previous eight years. In the first quarter of 2025, OxyChem exceeded guidance with a pre-tax adjusted income of $215 million.”

BRK doing a deal with a OXY when BRK is a major OXY shareholder is like paying yourself. In this case the purchase converts BRK cash into ownership of the chemical company as well as reducing debt and increasing cash at OXY. Reducing debt at OXY provides direct value to BRK. BRK uses $9.7B cash and gets the chemical business worth supposedly >$10B and 32.7% of $6.5B debt pay down and the same percentage of $9.7 - $6.5B = $3.2B of cash at OXY.

So net advantage to BRK:
>$10B chemical business
$2.12B OXY debt pay down
$3.2B OXY cash infusion
———
Total benefit $15.32B

Shaun

So net advantage to BRK:
>$10B chemical business
$2.12B OXY debt pay down
$3.2B OXY cash infusion
———
Total benefit $15.32B


I agree that there are some potential benefits, but I don't think that list is a good way to look at it.
At a very minimum, don't forget the ~$10bn cash going out the door.

If we take as a first approximation that Oxychem is being bought at around fair value, the value of an Oxy common share hasn't changed (perhaps even down a bit because of the tax hit from a cash sale), and the cash leaving the door at Berkshire exactly balances the value of the Oxychem business being bought. Maybe Berkshire is paying a little less than true fair value(and maybe not), but that's a second order effect at most.

What has changed, mainly, is that Berkshire now owns a whole lot more of the (existing) Occidental. The same ~27% fraction of the non-Oxychem business, plus now all of Oxychem instead of ~27% of it. If the acquired business accounted for 1/4 of the value of a prior Oxy share, then we now own something like 45% of the old combined business, before exercising warrants. (100% of the 25% which was Oxychem, and still 27% of the other 75%).

Jim

Reducing debt at OXY provides direct value to BRK. BRK uses $9.7B cash and gets the chemical business worth supposedly >$10B and 32.7% of $6.5B debt pay down and the same percentage of $9.7 - $6.5B = $3.2B of cash at OXY.

So net advantage to BRK:
>$10B chemical business
$2.12B OXY debt pay down
$3.2B OXY cash infusion
———
Total benefit $15.32B


There are 2 problems with this:
(i) Since BRK only owns the chemical business once, it loses the portion of OXY's chemical business that it already owned through OXY. In other words, we need an additional line:
-$3.27B diminished value of OXY, which no longer owns that $10B chemical business.
(ii) BRK only gets the benefit of 32.7% of the $3.2B of OXY cash increase, so that line should be:
$1.05B OXY cash increase

That means that Berkshire gets:
$10B chemical business
$2.12B OXY debt pay down
$1.05B OXY cash infusion
-$3.27B in value of the chemical business it previously owned through OXY

Total benefit $9.9B - which makes more intuitive sense anyways.

DTB

I agree with Jim's analysis and DTB's further comments. In other words, it was a fairly even deal on current value. Or, maybe the best Vickie was going to get under pressure.

But it was well executed. I posted earlier that I wasn't a fan of the deal - PROVIDING that someone else would pay the $10 billon that OXY was asking. That way BRK would benefit from the reduced debt of OXY - and still keep it's $10 billion of cash. But no one was willing to compete for the business - interesting - so it was up to BRK to do the deal.

Having decided to do so, they did a really good job on execution. They didn't pay the circa $10 billion share with either prefered shares or common stock. That would have saved OXY around $1.7 billion in taxes that otherwise could have gone to further reductions in debt - or more capital for buybacks. Instead, BRK - Buffett/Able or Able/Buffett - held on to both their high dividend preferred shares and/or potentially undervalued OXY stock. They didn't cut Vickie any sweetheart deals, another one of my concerns. They knew they had the advantage, and took it. Vickie had to do something, with current near-term prospects for O&G more to the downside than upside. Good for Buffett/Able or Able/Buffett.

My objection to buying Oxychem was that it was just another commodity business tied to the economic business cycle. I was hoping for a better use of the cash. Still, I do think that they gained some value now that the deal is done. Oxychem provides basic commodity chemicals that go into PVC manufacture (think real estate/housing,) water treating for communities, and paper manufacture. A basic commodity which will be in use for decades - and where they hold a high market share. It's unlikely they'll lose any money - more probably they'll earn better money than cash. Right now capex exceeds cash flow, but that's expected to turn soon. Overall a positive deal for BRK.

One important added point. They made sure that OXY retained any liabilities for past environmental problems - possibly dating back to the Love Canal disaster. Chlorine and chlorine derivatives can be nasty stuff if it enters the environment without proper controls. So BRK did it's due diligence this time.

Summary - I've become positive on the deal. Not great - a market breakdown buy - but still pretty good.

Yes, I rethought it and realized I wasn't getting the right model (and goofed the math a bit).

First the trade of cash for a subsidiary. That could be unbalanced but the simplest assumption is that it was an equal value trade. Ignore the effect on cash flow at OXY because the received cash, let's assume, included the present value of future profits from the subsidiary.

If it is equal value, why do the trade? The explanation from OXY CEO Hollub is that it provides cash to pay down debt. Paying down debt changes cash flow by increasing excess profits. "Occidental expects to use $6.5 billion of the transaction proceeds to reduce debt and achieve the target of principal debt below $15 billion set following the December 2023 announcement of its CrownRock acquisition."
from OXY press release https://www.oxy.com/news/news-releases/berkshire-h...

"That will reduce our interest payments by $350M."
"That will enable us to restart our share repurchase program."
"Start return of capital..."
from Becky Quick interview with Vicki Holllub https://www.youtube.com/watch?v=uVkq9LprCeg

If the stock price is below fair value it is a good time to repurchase shares and increase BRK's ownership percentage. Will BRK sell some shares?

Hollub also emphasizes the character of the oil and gas holdings as being in the U.S. and being a long term asset.

This could be a "stay rich" kind of investment.

Shaun

I don't understand what the big deal about OXY's Permian stake is other than the fact that it a domestic source of oil. I read that we don't even have the refining capacity to produce gasoline from the light sweet crude produced by the frackers in Permian so we export that crude. In stead we import heavy crude from Canada & refine it. There also seem to a lot of new discoveries in Guyana, Brazil (offshore & deep water) & Argentina. The Vaca Muerta region in Argentina apparently has more oil than Permian and is just beginning to be developed.

So I don't understand why OXY & Vicki are so highly regarded by Buffett, although he hedged his bets not only with the OXY preferred but also with a big stake in CVX.

I don't understand what the big deal about OXY's Permian stake is other than the fact that it a domestic source of oil. ..

I think the main explanation is the obvious one: it's in the US. Mr Buffett has never been fond of exposing the portfolio to any of the unpredictable risks of investing outside the US.

I doubt we'll hear him express an opinion of the evolving risk profile *inside* the US. He has already been cowed into declining to answer questions about how the economy is doing, but silence might not be enough. Given his (and Berkshire's) high profile, it seems nigh inevitable that Berkshire will be punitively targeted by the US government for something or other at some point. With luck it will just be a shakedown, not a shutdown. Now that the Apple position has been pruned, I imagine the greatest risk to the value of a share of Berkshire is no longer Apple's China exposure vis-a-vis politics and geoeconomics, but Berkshire's US exposure in the same realms. Ask a Kenvue shareholder.

Jim

" I doubt we'll hear him express an opinion of the evolving risk profile *inside* the US. He has already been cowed into declining to answer questions about how the economy is doing, but silence might not be enough. Given his (and Berkshire's) high profile, it seems nigh inevitable that Berkshire will be punitively targeted by the US government for something or other at some point. With luck it will just be a shakedown, not a shutdown. Now that the Apple position has been pruned, I imagine the greatest risk to the value of a share of Berkshire is no longer Apple's China exposure vis-a-vis politics and geoeconomics, but Berkshire's US exposure in the same realms. Ask a Kenvue shareholder.

Jim"


Congrats bud you get it. A huge tax on full sugar soda and snacks? A huge tax on processed foods? Its team trumps game the next three years.

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