Breakingviews: Occidental divi cut puts Buffett in driver’s seat

As of Tuesday, Vicki Hollub runs Occidental Petroleum in name only. The $13 billion shale driller cut its dividend by more than 80% after a price war wiped 25% off of the price of Brent crude oil. Hollub had previously pledged to defend the dividend at all costs, even at low oil prices. Now that the generous payout is gone, it’s only a matter of time before she goes too – and Occidental loses its independence.

Hollub’s job was already on thin ice, after she staked her reputation on a debt-fueled purchase of rival Anadarko Petroleum last year. Shareholders including Carl Icahn were particularly irked about the pricy $10 billion funding Hollub secured over a weekend from Warren Buffett’s Berkshire Hathaway, which allowed her to get the deal through without a shareholder vote. In the past year, Occidental’s shares have dropped some 80%. The lunge further into shale was a brave bet, but Hollub lost, and her position is untenable.

Occidental’s plight shows how foolish the sweetheart deal with Buffett really was. His investment delivers an 8% yield, equivalent to one-third of the $2.4 billion Occidental will save by cutting its payout to shareholders. Occidental can defer payments to the Sage of Omaha, but if it does so, the rate goes up to 9%. Buffett’s $10 billion investment is now almost equivalent to Occidental’s market capitalization, suggesting he accounts for almost half of its equity value.

That puts the Buffett in the driver’s seat if Occidental now becomes a takeover target. One possible buyer is Chevron, whose CEO Mike Wirth also wanted to buy Anadarko last year but backed off when Hollub raised her own ante. The $150 billion oil giant’s stock has fallen in the last year too, but only about a third. Smashing the two companies together, and converting Buffett’s stake to equity would leave debt roughly equivalent to just one year’s EBITDA – still less than rival Exxon Mobil.

The oil rout means that Occidental isn’t the only struggling asset potentially on the block. Buffett, whose approval would be invaluable for any deal, could play his usual hardball. But for Chevron, Buffett isn’t a bad partner to have in the oil patch. He has some $130 billion in cash to spend, and a keen opportunistic streak, even if he does occasionally back the wrong horse.

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