Berkshire Hathaway BRK.A is officially buying OxyChem, Occidental Petroleum’s OXY chemical division, for $9.7 billion in an all-cash transaction.
Why it matters: After some initial modeling of the deal, we think the market is rightly skeptical of the sale. While it’s true that the deal’s implied multiple of above 8 times 2025 EBITDA and nearly 7 times 2026 EBITDA is in line with peers, the entire chemicals industry looks discounted to us.
Berkshire is buying OxyChem at near trough levels in the cycle. This means we think that current multiples don’t adequately capture the benefits from earnings throughout the cycle.We still believe cash from the deal would mostly allow Oxy to deleverage its balance sheet and return some cash to shareholders, though most of that cash will favor bondholders. While we await further details, perhaps the most frustrating, is that the cash transaction will likely trigger a large tax bill.
The bottom line: We reduce our fair value estimate for no-moat Oxy to $63 from $65, in line with the stock’s reaction. Still, shares remain discounted in 4-star territory with over 40% upside.
We had hoped that at least part of the purchase would be funded through retiring Berkshire’s preferred shares, which could have mitigated most of the tax leakage. Instead, Berkshire appears to have capitalized on Oxy’s current financial position after last year’s CrownRock purchase.We think the deal destroys over $2 billion in shareholder value. While we leave our Standard Morningstar Capital Allocation Rating for now, Oxy CEO Vicki Hollub has made some major capital allocation decisions that lack a strong financial rationale between Anadarko, CrownRock, and now OxyChem.
Between the lines: Hollub has a difficult balancing act as we think the market rewards upstream firms with a good balance sheet and a strong history of capital returns, as well as quality inventory. Unfortunately, the latter goal affects the former priorities, given the cost of good assets.
The author or authors do not own shares in any securities mentioned in this article.
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