Warren Buffett drops a $10-billion bomb into Anadarko bidding war

Warren Buffett’s intervention in Occidental Petroleum Corp.’s $37-billion unsolicited bid for Anadarko Petroleum Corp. may tip the scales in the oil industry’s biggest bidding war in decades.

In a stunning escalation of the 2-week-old contest for Anadarko, Buffett’s Berkshire Hathaway Inc. on Tuesday disclosed plans to inject $10 billion into Occidental in exchange for preferred stock and warrants. The bombshell landed in the midst of Anadarko board deliberations about whether Occidental’s offer is superior to a lower but already agreed-to deal with Chevron Corp.

The arrangement was announced two days after Occidental’s corporate jet flew to Buffett’s hometown of Omaha. It’s contingent on the deal for Anadarko closing and would be his biggest investment in more than three years aside from Apple Inc. It also answers the question about what to do with a swelling cash pile just ahead of Berkshire’s annual shareholder meeting this weekend.

Furthermore, the deal is a major sign of approval for the future of the Permian Basin, the world’s largest oil field, from an investor who has previously plowed dollars into oil refiners, drillers and Canada’s oil sands.

The Occidental deal follows Buffett’s classic playbook: getting above-market rates on a preferred stake and the upside of stock options in exchange for the Berkshire seal of approval and a big check. In the past he has lent his reputation to banks facing doubts about their capitalization, and now he’s backing a proposed acquisition bid that’s facing questions over its legitimacy.

Buffett’s imprimatur is apparently valuable to Occidental Chief Executive Vicki Hollub: The 8% that would be paid out on the preferred shares is more than twice the average coupon on Occidental’s debt.

Chevron stuck to its guns after Buffett’s move. “We believe our signed agreement with Anadarko provides the best value and the most certainty to Anadarko’s shareholders,” company spokesman Kent Robertson said in an email.

PREVIOUSLY: Chevron is buying Anadarko. That would make it as big as Exxon and Shell »

Chevron’s cash-and-stock bid is valued at about $31.5 billion, or $62.70 a share.

Anadarko didn’t immediately respond to requests for comment.

Anadarko shares edged down 0.1% on Tuesday to $72.85, which is about 16% above Chevron’s offer price. Chevron shares climbed 2% to $120.06. Occidental shares fell 2.1% to $58.88.

Buffett, the world’s fourth-richest person, is demanding a high price for his support, according to Leo Mariani, an analyst at KeyBanc Capital Markets. The preferred stock represents “rather expensive financing,” he said in a note to clients. The arrangement with the Oracle of Omaha also came as a surprise, Mariani added, given that Occidental previously said it already had lined up financing for the Anadarko deal.

But Buffett’s backing means that Occidental may avoid a shareholder vote, said David Katz, chief investment officer at Matrix Asset Advisors Inc., which manages $800 million, including Occidental stock. “It seems like the CEO with the board’s support is going to do everything and anything to get the deal done.”

The arrangement shows that Buffett can still find unique opportunities in an environment where he has bemoaned the high prices for most companies. His annual shareholder meeting this weekend in Omaha is certain to feature questions about how he’d invest Berkshire’s cash, and he has started laying the groundwork to increase share buybacks, an option he historically has shunned.

Although the deal isn’t the “elephant-sized acquisition” that Buffett said in February he was hoping for, it would vault Occidental into the top 10 of Berkshire’s public company holdings, among the likes of Apple Inc., American Express Co. and Kraft Heinz Co.

Berkshire didn’t have much exposure to oil in its $173-billion equity portfolio at year’s end, though it did add a roughly $400-million stake in Canada’s Suncor Energy Inc. in the fourth quarter. The company is set to disclose its first-quarter stock purchases and sales next month.

Berkshire’s energy investments are mainly in renewables and power, but it also owns two natural gas transmission systems: Northern Natural Gas in the U.S. Midwest, and Kern River Gas Transmission in the West. Anadarko owns Western Gas Midstream Partners, which operates gas gathering and processing facilities in Texas, Pennsylvania and several Western states.