Although its share price has not fully recovered, Western Petroleum (New York Stock Exchange: OXY) it’s a well-managed company that could see a big upside down the line if oil prices stay high. In this clip from “The Rank” on motley fool live, recorded on April 25Motley 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 largest and smallest integrated oil and gas companies headquartered in the US. It doesn’t do everything on the same scale as the Chevrons (New York Stock Exchange: CVX) of the world do, but it has a relatively integrated business with the petrochemical business, some pipeline business, oil and gas exploration and production. So how did this end up in the berkshire (NYSE: BRK.A) (NYSE: BRK.B) briefcase? Two ways. I think it started when Oxy was acquiring Anadarko Oil (New York Stock Exchange: APC), and entered into a price war to buy Anadarko. And the price became kind of bananas, to the point where essentially everyone in the oil and gas industry criticized it as a massive overpayment. And since Buffett is one of those who do, sometimes those things happen. Businesses need money and Buffett has money. And having Buffett’s name attached to it is sometimes worth paying a very high premium to obtain. So, as part of the deal, there were warrants for his arrest. It was preferred stock, plus warrants for the Oxy stock. Preferred stock pays a very high dividend yield, and I think warrants haven’t yet. I don’t think they have been converted.
John Brommels: Have you exercised? I don’t think they did, do they?
Living: No, I think at this point, what happened is more recently, I think it was just a few weeks ago, Berkshire opened an equity position in Oxy, right? He bought a fairly large number of shares. In addition to the preferred shares you already own. That combined, I think, represents the 11%, 12% of Oxy that Berkshire owns. When those collaterals, if they convert those collaterals, I think they’ll more than double their share of the business, right? That’s how Uncle Warren gets a stake, right? And he has done the same thing in the past with Bank of America (New York Stock Exchange: BAC) back in the financial crisis. issue debt to harley-davidson (NYSE:HOG). It’s similar. Really cool terms for Berkshire, because his name was attached to it and there’s some positive credibility attached to it. Now, I ranked this stock number 3. Matt, you ranked it fourth. John and Zane ranked it at seven. Now why did I rank it as high as I did? No. 1 because, I think, comparing this to a lot of other oil and gas companies, it’s very much a leveraged bet on sustained high oil prices. You have a good chemicals business that is going to make money and will continue to make money, but you have a huge advantage because of persistent and sustained high oil prices, which I think we are going to see. The share price hasn’t fully recovered, but with that said, the company has also increased its number of shares by 25% over that same period. So there’s a caveat there, that the stock price needs to be 25% higher to fully recover to that pre-price value. That’s where we are right now, and that’s why I ranked it where I did. Matt, I would love for you to add as this is one that you have exposure to.
Matt Frankel: Well, it was watered down, if I’m not mistaken, because Buffett had the ability to take his preferred stock dividends into newly created Oxy shares.
Frankel: I like Western.
Living: I mean, I don’t know if Buffett had the preference. The company was in control and they had no cash. This is when oil turned negative in a period, right? Therefore, the best thing for the company was to pay it in shares.
Frankel: I can tell you that buying Occidental a month before oil went negative was not, in hindsight, the best decision I’ve ever made.
Living: If it makes you feel any better, I was investing in offshore oil drillers in the same period. They all filed for bankruptcy.
Frankel: It’s a well-run company, a very recent investment by Buffett that has really grown. When they were giving him those preferred stock dividends on stock, he was selling them immediately. He did not own Occidental shares until very recently. He immediately he was selling them for cash. Like you said, the company just didn’t have any. But, great management. I think if oil stays high, which I think it will for at least the next two years, if it stays high, this could be a big winner.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Jason Hall has no position in any of the aforementioned stocks. John Bromels has positions in Berkshire Hathaway (B shares). Matthew Frankel, CFP® has positions in Bank of America and Berkshire Hathaway (B shares). The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: Long $200 January 2023 Call Options on Berkshire Hathaway (B-Shares), Short January 2023 $200 Put Options on Berkshire Hathaway (B-Shares), and Short $265 Call Options on Berkshire Hathaway (B-Shares). January 2023 in Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.