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Since it became clear that Occidental Petroleum was challenging Chevron’s bid to buy Anadarko Petroleum, the odds have seemed stacked against Occidental. Chevron is five times its size and can easily raise more debt or equity than Occidental. But Occidental’s latest move—while financially questionable—gives the company a better chance of emerging on top, analysts say.

Occidental (ticker: OXY) said on Tuesday that it has made a deal to sell preferred stock in Occidental to Warren Buffett’s Berkshire Hathaway (BRK.A) for $10 billion. Berkshire will also get a warrant to buy up to 80 million shares of Occidental stock for $62.50 a share, slightly above the company’s stock price at the close on Monday. Occidental will sell the shares and warrants to Berkshire privately, and the deal will only go through if Occidental wins the bidding for Anadarko (APC).

Investors are still waiting for Warren Buffett to name a successor and find a way to boost Berkshire Hathaway's lagging stock.

Occidental’s bid for Anadarko is worth $38 billion—financed with both cash and Occidental stock—versus Chevron’s (CVX) $33 billion deal. Berkshire’s $10 billion investment gets Occidental a lot closer to the approximately $19 billion in cash it will need if its offer is accepted, writes CFRA analyst Stewart Glickman. But it won’t come cheap.

Like other deals that Buffett has entered to provide cash to an institution at a crucial moment, this one has some very attractive terms for Berkshire. The preferred stock, which has attributes of both debt and equity, will pay 8% a year. That is a considerably higher percentage than Occidental would likely have to pay for debt, says Carol Levenson of Gimme Credit.

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“In our experience, Warren Buffett is not a guy to offer easy financing terms, especially to desperate companies, and this is no exception,” she wrote in a note to clients. “Although the preferred is mandatorily redeemable under certain circumstances, it looks more like debt than equity to us.”

In an email to Barron’s, Levenson noted that Occidental’s 10-year bond is trading at 3.5%. “I would hope if markets are rational it would have to pay a modest premium to that to sell $20 billion in bonds. Not all the way up to 8%, though.”

“The bridge loan in the financing commitment is probably priced significantly below the bonds, although ratings dependent,” she added.

So why pay Buffett all this money instead of tapping the debt markets? Reputation. Buffett’s investment is a vote of confidence, particularly if Anadarko board members are worried about going with the smaller Occidental versus the larger Chevron. Anadarko would also have to pay Chevron a $1 billion breakup fee if it goes with Occidental.

“Does it make it more likely that Occidental will prevail over Chevron in the bidding war for Anadarko? In a psychology/sentiment sense, the answer is probably yes,” wrote Raymond James analyst Pavel Molchanov in a note to clients. “Anadarko’s board, which is in talks with Occidental, may well look at Buffett’s proposed investment as a ‘seal of approval’: an intangible but potentially valuable factor as the board is thinking about which bid to end up backing.”

Molchanov still thinks Chevron will end up buying Anadarko, because it has financial heft. Asked whether it will raise its bid, which is now below Occidental’s, Chevron said in a statement that “we believe our signed agreement with Anadarko provides the best value and the most certainty to Anadarko’s shareholders.”

For existing Occidental shareholders and bondholders, the Berkshire deal could be problematic. If Buffett exercises the warrants in the deal, for instance, it would dilute them by about 16%, CFRA’s Glickman notes. And the value of the dividends—$800 million in annual payments—amounts to about 14% of Molchanov’s 2020 net income estimate for Occidental (before factoring in contributions from Anadarko).

Shareholders seem to agree with Molchanov’s pessimism. Occidental’s stock was down 2.2% on Tuesday afternoon. Occidental didn’t respond to questions on why it preferred the Berkshire deal to taking on debt.

For bondholders, Levenson thinks the deal does “material damage to its credit profile,” and the damage could get worse if a bidding war escalates. “With Oxy bonds not really reacting dramatically to this event risk, we think Oxy bondholders should step aside until the dust clears.”

Write to Avi Salzman at avi.salzman@barrons.com