It had all the trappings of a classic Warren Buffett deal. There were the preferred shares created just for him, the warrants giving him an option to buy more common stock and a hefty dividend -- 8 per cent, which came to a cool US$800 million a year on the US$10 billion he plunked down.

On their face, the terms were so favorable for Buffett’s Berkshire Hathaway Inc. -- and so onerous for the company, the oil driller Occidental Petroleum Corp. -- that fellow billionaire investor Carl Icahn seethed with indignation. It was, he wrote, “like taking candy from a baby.”

But now some 11 months later, Buffett’s bet on Occidental is suddenly a far cry from the slam dunk that it once appeared. Few large companies, if any, in the U.S. shale patch have been hit harder than Occidental by the collapse in oil prices this week. Things have gotten so bad that Icahn, who’s pushing to fire the board, has taken a 10 per cent stake and Thursday announced he sees “strong bids” emerging as oil prices recover.

Occidental’s shares were whipsawed, falling 20 per cent before reversing course and rising as much as 26 per cent. Trading was halted after circuit-breakers were breached and short selling suspended for a period. It traded 6.7 per cent higher at US$12.63 as of 2 p.m. in New York. The day Buffett invested last April, the shares closed at US$58.88.

While Buffett’s preferred shares don’t trade, the plunge in price on the company’s common stock, down 62 per cent this month, and in its benchmark bonds, down 25 per cent, provide clues about the market’s perception of the value of his investment.

For Buffett, the episode marks another setback for one of his key investments, just a year after the Kraft Heinz Co. writedown unleashed turmoil at that business. It also raises questions once again about how he intends to use his massive cash holdings -- US$128 billion at last blush -- with few wholly appealing investment options to choose from.

The US$10 billion investment in Occidental, his first major deal in four years, was instrumental in allowing the company to win a bidding war for Anadarko Petroleum Corp. But the transaction is only exacerbating Occidental’s troubles. Previously a steady, diversified oil producer, Occidental is now a heavily indebted shale oil producer highly subject to the whims of crude prices. Buffett himself conceded last year that the success of the deal depended on the vagaries of the oil market.

“The structure of the deal was a classic Berkshire deal,” Cathy Seifert, an analyst at CFRA Research, said. “Again, timing is everything and what a difference a year makes.”

The recent market turmoil has stoked speculation that a potential bidder for Occidental could end up being Buffett himself. Berkshire didn’t respond to requests for comment.

Things haven’t totally unraveled on Berkshire’s investment yet, of course. For now, in fact, the preferred shares continue to throw off cash -- US$200 million every quarter -- and also rank above the common stock when it comes to liquidation. Berkshire does also hold some common shares, but they totaled just US$780 million at the end of the year, equal to only 0.3 per cent of Berkshire’s entire stock portfolio.

Buffett’s record of preferred stock deals have often played out in his favor. He bought stakes in General Electric Co. and Goldman Sachs Group Inc. during the financial crisis. Both of those preferred stakes paid 10 per cent dividends.

But he’s been struggling to find attractive ways to put his near record cash pile to work. While his company has built up a more than US$70 billion stock holding in Apple Inc. through the end of 2019, Buffett had failed to find major transactions since his 2016 acquisition of Precision Castparts Corp.

And while the Occidental deal was lauded by analysts at the time, it put Buffett in a notoriously volatile industry. Few predicted, of course, that a split between Russia and its one-time OPEC allies would spark a price war. The ensuing crash in those prices eventually forced Occidental to cut its dividend for the first time in three decades Tuesday. Berkshire’s preferred stake was unaffected by the cut, but Berkshire’s common stock holding will feel the ripple effects unless Buffett’s company tweaked that holding since the end of the year.

Buffett isn’t as concerned about a major shift in the long-term outlook for the business.

“I don’t think the secular demand will change that much,” Buffett said in a recent interview with Yahoo Finance. “But certainly the immediate demand has changed.”

Stock Surge

Cutting capital expenditure by a third and slashing the dividend almost 90 per cent will help drive Occidental’s break-even costs down to the low US$30 a barrel range, Chief Executive Officer Vicki Hollub said in a statement Tuesday. The move, and broader stock market gains, helped the company stock surge nearly 15 per cent that day.

But the cut to Occidental’s prized dividend limits payouts to common stockholders, including Icahn, who has been battling the company for months over the Anadarko deal.

“It is one of the worst disasters in financial history and we believe the CEO and Board must be held accountable,” Icahn wrote in a filing today. When bidders come knocking, the company should have a board that “will encourage, not discourage” them.

Icahn said late Wednesday that he had increased his stake in Occidental to about 10 per cent, from 2.5 per cent previously, and he renewed his attack on the company’s board. “In other cultures, they would have the dignity to resign or worse,” Icahn said by phone. “In the army, they would be court-martialed, but here they would probably grant themselves bonuses because their stock options have collapsed.”

A representative for Occidental declined to comment on Icahn’s position.

In the short-term at least, the Anadarko deal has come at a major cost to shareholders. Occidental is down about 80 per cent since its interest in Anadarko first became public almost a year ago, compared with a decline of around 55 per cent in the S&P 500 Energy Index, and a similar drop in oil.

Occidental’s dwindling market value has raised speculation over whether Buffett would ever buy the company outright. While Buffett has the funds, any eventual purchase would depend on his outlook for the oil market and other variables, said David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business.

“It’s certainly well within the US$128 billion that Buffett has to spend,” Kass said. “But would the risks far outweigh the expected reward?”