Though its stock price hasn't fully recovered, Occidental Petroleum (OXY 0.26%) is a well run company that could see sizable upside ahead if oil prices remain elevated. In this clip from "The Rank" on Motley Fool Live, recorded on April 25, Motley Fool contributors Jason Hall, John Bromels, and Matt Frankel discuss how they ranked the oil and gas company.
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Jason Hall: This is one of the smaller U.S.-based integrated oil and gas majors. It doesn't do everything to the same scale as the Chevrons (CVX 0.23%) of the world do, but it does have a relatively integrated business with the petrochemicals business, some pipelines business, oil and gas exploration, and production. So, how did this end up in the Berkshire (BRK.A -1.14%) (BRK.B -1.45%) portfolio? Two ways. I think it started out when Oxy was acquiring Anadarko Petroleum (APC), and it got into a price war to buy Anadarko. And the price got kind of bananas, to the point where essentially everybody in the oil and gas industry was panning it as a massive overpay. And as Buffett is one to do, sometimes those things happen. Companies need money, and Buffett has money. And having Buffett's name attached to it sometimes is worth paying a very high premium to get it. So as part of the deal, there were warrants. It was preferred stock, plus warrants for Oxy's shares. The preferred stock pays a very high dividend yield, and the warrants, I believe, still have not been. I don't think they've been converted.
John Bromels: Been exercised? I don't think they have, have they?
Hall: No, I think at this point, what's happened is more recently, I think it's only been a few weeks ago, Berkshire opened an equity position in Oxy, right? Bought a pretty substantial amount of shares. On top of the preferred stock that it already owns. That combined, I think, makes up 11%, 12% of Oxy that Berkshire owns. When those warrants, if they do convert those warrants, I think that'll more than double its stake in the business, right? So that's how Uncle Warren has a stake, right? And he's done the same thing in the past with Bank of America (BAC -2.96%) back in the financial crisis. Issue debt to Harley-Davidson (HOG -1.92%). It's similar. Really great terms for Berkshire, because his name was attached to it and there's some positive credibility that's attached to it. Now, I ranked this stock No. 3. Matt, you ranked it four. John and Zane ranked it seven. Now, why did I rank it as high as I did? No. 1 because, I think, comparing this to a lot of the other oil and gas companies, it is very much a leveraged bet on sustained high oil prices. It has a good chemicals business that's going to make money and keep making money, but it has a tremendous amount of upside to persistent, sustained high oil prices, which I think we're going to see. The stock price has not fully recovered, but with that said, the company has also increased its share count by about 25% over that same period. So there's a caveat there, that the stock price needs to be 25% higher to be fully recovered to that pre-price value. So that's kind of where we are right now, and that's why I ranked it where I did. Matt, I'd love you to add since this is one you've got exposure to.
Matt Frankel: Well, it was diluted, if I'm not mistaken, because Buffett had the ability to take his preferred stock dividends in newly created shares of Oxy.
Hall: In shares. Right.
Frankel: I like Occidental.
Hall: I mean, I don't know that Buffett had the preference. The company had control, and they didn't have any cash. This is when oil went negative at one period, right? So, it was in the best interest of the company to pay it in shares.
Frankel: I can tell you buying Occidental a month before oil went negative was not, in hindsight, was not the best decision I've ever made.
Hall: If it makes you feel better, I was investing in offshore oil drillers at the same period. They all went bankrupt.
Frankel: It's a well-run company, a very recent Buffett investment he's really ramped up. When they were giving him those preferred stock dividends in stock, he was selling them immediately. He didn't own any Occidental shares until very recently. He was just immediately selling them for cash. Like you said, the company just didn't have any. But, great management. I think, if oil stays elevated, which I think it will for the next couple years at least, if it stays elevated, this could be a pretty big winner.