Energy giant Occidental Petroleum (OXY) is acquiring privately-held oil and gas producer CrownRock in a cash-and-stock deal worth $12 billion. The companies expect the deal to close in the first quarter of 2024. Cole Smead, CEO of Smead Capital Management, joins Yahoo Finance to break down the deal, as well as the state of the energy sector and why he believes that "We're probably going to end the 2020's with 10 oil companies in America."

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Video Transcript

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DIANE KING HALL: Another deal in the oil and gas space. Occidental Petroleum is buying CrownRock for roughly $12 billion. The deal expected to close in the first quarter of 2024. This comes after several energy consolidations this year, including Exxon buying Pioneer and Chevron acquiring Hess. Our next guest has been calling for just this sort of consolidation in the industry, and he was betting big on Occidental. His firm's largest holding in its portfolio is the petroleum company.

To break down what's going on in the sector, we want to bring in Cole Smead, CEO of Smead Capital Management. Cole, thanks so much for joining us as usual. It wouldn't be merger Monday without a deal to talk about, right? So let's just jump right into this latest. What does this-- there has been, obviously, a lot of consolidation this year, what does this say about the state of the industry now?

COLE SMEAD: Yeah. Thanks for having me. What it says is that there are assets out there that you can buy more attractively than your own company stock. And that's, you know-- use this as a private to public transaction. In effect, these assets are going public into OXY stock at the same time. And we're going to continue to see these arbitrage.

I mean, there's not a ton of deals like this from a private to public, but there's a lot of public to public that has to go on too. We're probably going to end the 2020s with 10 oil companies in America. And so just do the math of where we got to go from point A to point B to get to that. But again, you know, let's say Oxy, most of this deal is going to be done on debt. They're going to borrow that money at say 7% to 8%. Their free cash flow yield on the assets they're buying is higher than that.

So they're just fixing in their costs. They're going to collect the spread in between. Pay off this and the little equity they are floating they'll buy back within one year of free cash. So as shareholders, our hands are applauding and very excited about what Vicki's doing.

JARED BLIKRE: And Cole, there is a Berkshire Hathaway Warren Buffett angle to this. Occidental Petroleum, one of Berkshire Hathaway's largest position, or I should say one of the positions-- one of the largest positions in the company. And an interesting paragraph here I'm reading in a Bloomberg article has to do with the nexus between Occidental and Warren Buffett.

In the run up to the deal, Occidental's corporate jet flew from Houston, where company headquarters is located, to Omaha, Warren Buffett's home on November 27 and they stayed grounded for about three hours. It was a second time Oxy's jet visited Omaha in November, having not previously made this trip since May, flight data show. So this almost seems to be a regular thing. Can you talk about the relationship between Berkshire Hathaway, Warren Buffett, and Occidental Petroleum?

COLE SMEAD: Yeah. I mean, it's a lot like having a private partner in a business. Buffett owns well over 30% of the business. So if you had a large shareholder like that and you're going to go out and do a transaction where you're going to be borrowing money, would you go to them and tell them what you're doing? The answer is you obviously would do that.

And that's they're just treating them like a large tenant shareholder for the stock, and you know, they should because, obviously, Warren not only has provided capital at times, but he's also owning so much of the business. So I think that makes a lot of sense You got to remember, too, that Buffett said at the Berkshire meeting that he doesn't have a plan to acquire Oxy. So I think that's the other thing you got to take against it.

In other words, he really likes being a public shareholder. Doesn't mean he can't buy more from here. From the public he's on a FERC approval basis, he's approved up to 50%. If he'd like to go above that he'd have to go get federal approval for that. But I just say it because it doesn't preclude him from buying more stock today. And obviously, like you're pointing out, Vicki's going to call him when she's going to do a deal, and she's going to at least communicate with him as shareholder as a minimum. But wouldn't you love to be a fly on the wall in that office that day?

JARED BLIKRE: Yes.

DIANE KING HALL: Indeed. Wouldn't we all?