After changing its accounting for its stake in Occidental Petroleum Group, Berkshire Hathaway Inc could now see its bottom line balloon.
Berkshire announced in its third quarter report it was switching to the equity method of accounting for its 20.9% stake in Occidental Petroleum Corp, which is worth more than $14 billion.
Starting in the fourth quarter, Warren Buffet’s investment vehicle will report its own results along side the results of its share of the Houston-based energy company, with a one-quarter lag.
The equity method is usually required under accounting rules, once a company’s stake in another reaches 20% or more, to prevent the first company from exerting undue influence.
In August Berkshire acquired approval from the US Federal Energy Regulatory Commission to purchase up to 50% of Occidental’s common stock.
After Berkshire promised if would not seek to boost consumer costs or undermine competition, the Commission declared the increase would be, “consistent with the public interest.”
According to Refinitiv I/B/E/S, analysts expect Occidental will post more than $10 billion in profit, on average, following the surge in oil prices produced by Russia’s military operation in Ukraine.
Since 2022, Occidental’s stock price has more than doubled.
Berkshire also holds $10 billion in Occidental preferred stock, and holds warrants to purchase another 83.9 million common shares for $5 billion at a price of $59.62 per share. That is 23% less than the current $73.27 price per share. The above-mentioned 20.9% stake does not consider any of these holdings.
Jim Shanahan, an analyst covering Berkshire at Edward Jones & Co. said, “Reporting its proportional share of earnings will reduce Berkshire’s price-earnings multiple, making its stock look less expensive.”
Berkshire already uses the equity method for its 26.5% stake in Kraft Heinz Co and its 38.6% stake in Pilot Travel Centers, a truck stop operator.
Berkshire does not use the equity method with its 20.3% stake in American Express Co, as part of a 1995 agreement with the Federal Reserve board of governors, in which it promised to maintain its stake as passive.
Some analysts have speculated that at some point Berkshire may ultimately buy Occidental, as a means of diversifying its energy portfolio.
