On the last Friday in April, Warren Buffett got a call from Brian Moynihan, the CEO of Bank of America, asking if he would back Occidental Petroleum’s underdog bid for rival oil driller Anadarko. Two days later, Occidental CEO Vicki Hollub was making the pitch herself, having flown to Omaha to appeal directly to the world’s most famous invest or. It took Buffett only an hour to say yes.
That Sunday, the Berkshire Hathaway CEO promised $10 billion in financing to Occidental if Hollub could get the deal done. There was, of course, one complicating factor: Anadarko had already pledged to sell itself to oil giant Chevron and would owe the latter $1 billion if it broke their engagement. What followed was a remarkable coup d’?tat in America’s own oil-soaked Emirate–the famous Permian Basin that stretches 86,000 square miles from Texas to New Mexico–and it all happened in hyperspeed.
Just a week and a half after Buffett and Hollub’s meeting, a bidding war that had played out in daily headlines was over: Chevron (No. 11 on this year’s Fortune 500) walked, and Occidental (No. 167) announced it would buy Anadarko (No. 237) for a total price tag of $57 billion including debt. It’s the largest U.S. oil and gas merger in more than 20 years (since Exxon bought Mobil) and would catapult the combined company into the Fortune 100 elite.
Buffett, in an interview discussing his investment, told CNBC, “It’s a bet on oil prices over the long term more than anything else.” Yet notably, what he didn’t say was whether he was betting on oil prices to be higher. (He declined to comment to Fortune for this story.) “It’s also a bet on the fact that the Permian Basin is what it’s cracked up to be,” Buffett added during the TV segment, without elaborating.
Of course, what the Permian is–quite literally–cracked up to be is one of the biggest oil reserves America has ever known. And it has made the U.S. the top oil-producing country in the world. Its thick shale deposits, hydraulically fractured and pumped for oil, have attracted not only Chevron, Occidental, and Anadarko, but also hundreds of other drillers, which have claimed a big chunk of West Texas (as well as a corner of New Mexico). The “fracking” boom, as it’s known, is responsible for pushing U.S. crude production to a record of roughly 11 million barrels a day in 2018, surpassing Saudi Arabia and Russia for the first time since the end of the Cold War. As of the latest monthly data, the Permian alone produces more crude per day than the United Arab Emirates, Canada, or Iran; by next year, some expect it could also outpace Iraq, which would make the southwestern region the fourth-largest oil producer in the world, if it were its own country. “The Permian is the absolute 800-pound gorilla for shale,” says Mike Morey, CIO of Integrity Viking Funds, who …read more