This Top Warren Buffett Stock Is Making a Game-Changing Deal

Key Points

• Occidental Petroleum is selling its OxyChem subsidiary to Berkshire Hathaway.

• The oil company will use most of the proceeds to shore up its balance sheet.

• The deal will sharpen Occidental's focus on growing its oil and gas business.

• 10 stocks we like better than Occidental Petroleum ›

Warren Buffett has long held Occidental Petroleum (NYSE: OXY) and its CEO, Vicki Hollub, in high regard. His trust in Hollub led Buffett's company to invest heavily in Occidental. Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) now owns over $12.6 billion of Occidental's stock -- almost 27% of its outstanding shares -- making it Berkshire's sixth-largest holding at 4.1% of the investment portfolio.

In addition to Occidental's leadership, Buffett's company sees unique value in Occidental's assets. While Buffett has previously stated that acquiring the entire company was not his goal, he clearly sees strategic value in owning a part of the company: OxyChem. Berkshire is paying $9.7 billion for the chemicals company -- a move that will significantly reshape Occidental's business.

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Drilling down into the OxyChem deal

Berkshire Hathaway is buying OxyChem for $9.7 billion in cash. OxyChem is a global manufacturer of commodity chemicals essential to water treatment, pharmaceuticals, and other key industries. It operates 23 facilities around the world, producing items such as caustic soda (the second-largest merchant seller in the world) and PVC (the third-largest domestic supplier).

OxyChem is consistently profitable despite the ups and downs of the chemicals sector. The company is about to deliver a step-change in profitability, driven by a major investment phase. Occidental was on track to invest over $1.5 billion into several projects through 2026, including the modernization and expansion of the Battleground plant in Texas. These and other projects will add an incremental $325 million in annualized earnings before interest, taxes, depreciation, and amortization (EBITDA) to OxyChem's total in 2026 and beyond.

The steady cash flows and growing profitability of OxyChem make it an ideal fit for Berkshire Hathaway, which already has experience operating in the chemicals sector. Berkshire also owns specialty chemical company Lubrizol, which it bought for $9.7 billion in 2011.

How this deal will change things for Occidental

The sale of OxyChem will reshape Occidental Petroleum. The oil company plans to use $6.5 billion of the proceeds to immediately repay debt. That would enable the company to achieve its long-standing target of reducing its principal debt below $15 billion. Occidental plans to put the remaining $1.5 billion in after-tax proceeds on its balance sheet, enhancing its financial flexibility.

Debt has been an issue for Occidental Petroleum over the years. The oil giant bought rival Anadarko Petroleum in a cash-heavy $55 billion deal in 2019. Berkshire Hathaway assisted the company with funding for the acquisition by making a $10 billion preferred stock investment in Occidental. That deal turned out to be poorly timed as oil prices crashed early in 2020 when the pandemic hit. Lower crude prices and issues with selling assets significantly impacted the company's ability to achieve its initial debt reduction targets.

However, Occidental slowly dug out of that hole as oil prices improved. That enabled it to make another debt-heavy deal in late 2023 when it agreed to buy CrownRock for $12 billion. The company set goals at that time to repay at least $4.5 billion of debt within a year of closing the deal and eventually reduce its principal debt to below $15 billion.

Occidental quickly achieved its initial goal by using free cash flow and asset sales. Now it will reach the $15 billion target by selling OxyChem.

Achieving that lower debt level will improve Occidental Petroleum's credit metrics and financial flexibility. It will also save the oil company over $350 million annually in interest expenses, boosting its free cash flow. The increased financial flexibility will enable Occidental Petroleum to opportunistically repurchase shares and repay additional debt as it matures. The oil company can also continue growing its dividend. Additionally, Occidental plans to resume the redemption of Berkshire's preferred equity investment, which it anticipates beginning in August 2029 after it builds a bigger cash balance.

In addition to significantly reshaping the company's financial profile, the deal will sharpen Occidental's focus on oil and gas production. The company will have greater financial flexibility to invest in unlocking the treasure trove of low-cost oil and gas resources it has around the world. As Hollub put it in the press release unveiling the sale, the transaction will "create this strategic opportunity that will unlock 20+ years of low-cost resource runway and deliver meaningful near and long-term value."

A financially stronger, more focused oil and gas company

The sale of OxyChem is a transformational event for Occidental Petroleum. The oil company will achieve its long-term debt reduction target, significantly enhancing its financial flexibility while reducing interest expenses. It will also narrow the company's focus on growing its oil and gas business. As a result, Occidental will become a significantly lower-risk oil company with substantial long-term growth potential as it focuses on developing its vast, low-cost oil and gas resources.

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Matt DiLallo has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.