On August 19th, Berkshire Hathaway was approved by the FERC to purchase as much as 50% of Occidental Petroleum (NYSE: OXY).

In July, Berkshire Hathaway purchased stock in Occidental for $582 million (for 9.9 million shares to increase the stake to 17.4%) and then for $698 million (for 12 million shares) to increase the ownership to 18.7%.

In 2019, Buffet invested $10 billion into Occidental preferred shares (yielding 8% annually) to facilitate the acquisition of Anadarko Petroleum. The deal also included warrants to buy an additional $5 billion of common shares at $59.62 per share (for 83.9 million shares under an 8-year maturity).

Occidental's market value is approximately $66.41 billion. Full ownership via open market purchases will likely cost approximately $50 billion. Berkshire has $105.4 billion in cash and is on pace to generate $32 billion in cash per year. Buffett stated he wants to keep $30 billion in cash in reserve. Berkshire also currently has a $23.7 billion position in Chevron (CVXN).

Investment in oil and gas exploration and production peaked in 2014 at approximately $0.8 trillion and has averaged approximately $0.4 trillion per year over the past decade. Combined with the age and thus continuous decrease in output from the super fields, this predicts a structural decrease in world supply in the future. Occidental has a low operating profit threshold at $40 per barrel as well as large positions in the Permian basin (at 1.4 million acres of conventional and 1.5 million acres of unconventional), Gulf of Mexico (at 0.8 million acres), and Rockies (at 0.4 million acres in the Powder River Basin and 0.8 million acres in the DJ Basin). Full ownership under Berkshire Hathaway would provide a buffer for Occidental against commodity price instability.

The Inflation Reduction Act increases the tax credit for removing CO2 from the atmosphere to $180 per ton and provides $3.5 billion to construct four hub facilities for direct air capture (DAC). Occidental is constructing the world's largest direct air capture facility - designed to capture 1 million metric tons of CO2 from the atmosphere per year - that will come online in the Permian basin in early 2024. Long-term, Occidental is projecting operation of three carbon sequestration hubs by 2025 and an additional 69 smaller DAC facilities by 2035.

Additionally, the Act provides $100 million to design pipelines to transport compressed CO2 to underground storage sites, and private-sector loans and grants of $2.1 billion for pipeline construction. Berkshire also owns Northern Natural Gas, which is the largest interstate natural gas pipeline company in the U.S.

Furthermore, the Inflation Reduction Act supports increasing the subsidy for capturing CO2 from polluting sources from $50 to $85 per metric ton. This increase enables economically viable capture from natural gas facilities as they require additional steps to separate the CO2 from the output streams. Similarly, capture at coal plants (that emit a blended gas stream with approximately 13% CO2) and cement plants should also become economically feasible.

Moreover, facilities that require minimal separation of the output gas will be even more cost-effective. A prime example is ethanol processing facilities (e.g., for vehicle fuels) where a near pure stream of CO2 is emitted from the corn fermentation tanks. Berkshire Hathaway owns 38.6% of Pilot gas stations and has an agreement to acquire an additional 41.4% of Pilot in early 2023 to increase to an 80% ownership stake. In January 2021, Pilot’s GreenAmerica Biofuels unit purchased the Nebraska based Green Plains 65-million-gallon ethanol plant for $64 million.

Berkshire is not required to buy any additional Occidental shares under the current FERC authorization. A larger percentage ownership will require additional approval from the FERC.

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