Berkshire's Ownership of Occidental Exceeds 20%
Accounting treatment for 20% positions has varied over the years, as we can see from the cases of BNSF, Moody's, DaVita, Kraft Heinz, and American Express
On July 21, I published Buffett's Bet on Occidental Petroleum which provides an overview of Berkshire’s accumulation of Occidental common stock in recent months along with a description of Berkshire’s holdings of Occidental preferred stock and warrants. It looks like $60 per share is about the upper limit that Warren Buffett is willing to pay for Occidental stock, most likely because Berkshire also holds warrants to purchase up to $5 billion of Occidental stock at a price of $59.42 per share.
When Occidental stock declined below $60 on August 4, Mr. Buffett resumed his purchases. In total, 6,681,669 shares were purchased for $390.7 million over three days according to a Form 4 filed with the SEC on August 8. The exhibit below shows the recent purchases along with a running total of shares purchased and the total cost.
The shares purchased from August 4 to 8 were at an average cost of $58.48. The overall position of 188,366,460 shares were purchased at an average cost of $52.80 for a total of just under $10 billion.
Although Mr. Buffett has been buying Occidental stock for months under $60, market participants seem perennially surprised when new purchases are reported. Occidental stock promptly shot up well above $60 on August 9 and this most likely stopped Mr. Buffett’s buying for now.
The exhibit below shows all of Berkshire’s purchases of Occidental common stock grouped by the day of the purchase:
Accounting for 20% Positions: Prior Examples
Berkshire now owns 20.2% of Occidental’s common stock outstanding based on the most recent share count reported by Occidental in its latest 10-Q. As I described in quite a bit of detail in the July article, although there is little economic difference between owning 19.9% of a company and owning 20%, exceeding that threshold can trigger an important change in accounting.
The equity method of accounting is used when a company has a “significant influence” over an investee. What is significant influence? According to the PricewaterhouseCoopers US IFRS & US GAAP guide, significant influence is presumed to exist for investments of 20% of more in common stock.
I won’t repeat the contents of the July article which explained how the equity method of accounting affects the financial statements. For this article, I thought it would be interesting to look back at Berkshire’s history to see how management has dealt with the accounting treatment of investments when the 20% ownership level is exceeded.