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Posted
7 hours ago, LearningMachine said:

 

 

 

The risk here is not about just losing 30% if only 30% is owned, but the risk here is about losing 500 to 1000% of the investment if 100% is owned.  If BRK owns OXY as a subsidiary fully, in case of a deep oil spill, courts can pierce the corporate veil to reach BRK assets like they did in case of BP subsidiary to reach BP parent's assets.  So, full $58B OXY purchase can create a $250B liability.

 

Ajit explained how they make insurance bets at a recent annual meeting that they are willing to risk a certain percent of their capital.  I think he said risking somewhere around 5% of capital on a bet.  Risking $250B liability would be too much for BRK. 

 

When justifying BRK's purchase of BNSF, Buffett and Munger once explained how they looked at the highest damages that a BNSF accident had ever caused in the past, and had decided that they could live with that.  However, they can't live with the highest damage that a deep water oil spill can cause. 

I agree that WEB might not want to own a company with deep water wells, but he didn’t say that he likes oxy because of the deep wells. The income from OXYs deep water wells is small. He could easily buy oxy and divest the deep wells and keep the upside of carbon capture and Vickie’s ability to separate oil from rock. 

Posted
7 hours ago, LearningMachine said:

 

 

 

The risk here is not about just losing 30% if only 30% is owned, but the risk here is about losing 500 to 1000% of the investment if 100% is owned.  If BRK owns OXY as a subsidiary fully, in case of a deep oil spill, courts can pierce the corporate veil to reach BRK assets like they did in case of BP subsidiary to reach BP parent's assets.  So, full $58B OXY purchase can create a $250B liability.

 

Ajit explained how they make insurance bets at a recent annual meeting that they are willing to risk a certain percent of their capital.  I think he said risking somewhere around 5% of capital on a bet.  Risking $250B liability would be too much for BRK. 

 

When justifying BRK's purchase of BNSF, Buffett and Munger once explained how they looked at the highest damages that a BNSF accident had ever caused in the past, and had decided that they could live with that.  However, they can't live with the highest damage that a deep water oil spill can cause. 

I agree that WEB might not want to own a company with deep water wells, but he didn’t say that he likes oxy because of the deep wells. The income from OXYs deep water wells is small. He could easily buy oxy and divest the deep wells and keep the upside of carbon capture and Vickie’s ability to separate oil from rock. 

Posted
10 hours ago, Jaygo said:

I didn't find his tone to be overly dour. Perhaps just cautious and a bit nostalgic for the days of KO and AMEX, higher returns and possibly fewer headaches.

 

Moreso I think he is making a statement on the juxtaposition of men and women working their asses off in freezing weather, scraping bodies off the tracks only to be manipulated by the Washington ( politicians, ESG dicks, WS ) elite with a stroke of a pen from the comfort of a taxpayer funded office. 

 

I think the same goes for the capital and ingenuity of BHE and the like. If you want to unfairly punish the utility sector for political points enjoy sitting in the the dark, we will take our new capital elsewhere. The utility is mandated to provide power even in the most remote places but when storms, or fires hit these hard to service remote places the utility is on the hook for damages. People bitch when the power is out, bitch when the bill comes due and now litigate for freak accidents in areas where power lines probably shouldn't have been in the first place.

 

 

 

 

 

Yeah, I think this interpretation is how I read it. Politician want their cake and eat it too. Never would I have thought BHE or BNSF would be a poor place to re-invest given what they do for the country. His statements seem like a warning to regulators.

Posted
11 hours ago, Xerxes said:

Or at least he can create a runway of expectations for it. But leave the final call to future management. 

I feel the "no possibility of eye-popping performance" is a first step in setting that expectation.

Posted

A few words on the evolving Energy situation.

 

Yes, of course, one has to wonder how the US ('We') will navigate the meanders between deregulation an reregulation in the energy universe (especially relevant now with the democratic drift question, the unusually high level of bipolarization, unusual inability to "get things done" etc   versus   the actual present challenges: wildfire costs, distributed energy, climate-related issues, huge capital needs etc).

 

Opinion: Mr. Buffett is a great communicator but also a great negotiator.

 

For Geico in the 1970s, he let Jack Byrne be the contractor and carry the stick while he remained the architect and became personally involved (with the carrot part) interacting with Max Wallach, a key DC insurance regulator, in order to reverse what seemed to be an obvious end of going concern destination for Geico.

For the Solomon scandal, he also became personally involved with regulators and law makers (especially Nicholas Brady) in order to actually reverse a government decision with ominous implications for the company.

Not so long ago (2015, NV Energy vs SolarCity), there was some drama (potential unfairness of return on equity for the utility with net metering over distributed solar energy) and there were negotiations but who actually remembers now the relatively deep questioning about the potential ability to resolve this issue?

 

The issues now are larger (1-how to deal with wildfire costs and 2-is the trend for less-friendly regulated approved reasonable returns a secular one?) and it's not clear who Mr. Buffett needs to talk to but he somehow decided to use the stick and is clearly sending a message (the annual report will obviously be read by relevant regulators all around the country).

 

For the wildfire costs which are very large, the damages to be paid have been and will be determined by juries and the court systems and that's unlikely to change. What needs be figured out is a way to cap those damages (outside of clear negligence and recklessness) and to pass those costs to the electricity consumers. It will happen somehow.

Interesting reference:

Microsoft Word - 2024_02_14 Utility Companies with Wildfire Liability Exposure Pose Unique Considerations for Investors.docx (clearygottlieb.com)

 

For the regulated ROE question, much has been said about "energy justice" inputs which have had, at least so far, a limited and patchy impact on rates approved. It's about a balance of forces and some of those forces underline the unusually high executive compensation (an idea that Mr. Buffett certainly approves) as an excessive input into the approved rate decision.

 

Also, now that approved rates sometimes go down from something like 10% to 9%, before mounting the barricades, an historical perspective may be helpful keeping in mind that interest rates, apparently, at least in some instances, act like gravity on valuations. 

 

roe.thumb.png.16a71a1c0d4b398206714d2a1cc56348.png

Any idea as to why this has suddenly become such an existential issue?

Posted
2 hours ago, yesman182 said:

I agree that WEB might not want to own a company with deep water wells, but he didn’t say that he likes oxy because of the deep wells. The income from OXYs deep water wells is small. He could easily buy oxy and divest the deep wells and keep the upside of carbon capture and Vickie’s ability to separate oil from rock. 

 

@yesman182, yes, he could do that and I've mentioned that earlier as well.  With the recent purchase, OXY has already indicated they are going to divest certain assets - remains to be seen if they shed the riskier ones.   Given Buffet is involved, they probably would.  

Posted
12 hours ago, Jaygo said:

 

Moreso I think he is making a statement on the juxtaposition of men and women working their asses off in freezing weather, scraping bodies off the tracks only to be manipulated by the Washington ( politicians, ESG dicks, WS ) elite with a stroke of a pen from the comfort of a taxpayer funded office. 

 

 

Since he complained about railroad wages in the letter, I think he wanted to make it clear that while he respects the front line workers he has issues with the politicians.

 

Otherwise "billionaire rail baron complains about front line worker wages in letter to millionaire investors" is a bad look.

Posted (edited)
21 minutes ago, Cigarbutt said:

For the wildfire costs which are very large, the damages to be paid have been and will be determined by juries and the court systems and that's unlikely to change. What needs be figured out is a way to cap those damages (outside of clear negligence and recklessness) and to pass those costs to the electricity consumers. It will happen somehow.

Interesting reference:

Microsoft Word - 2024_02_14 Utility Companies with Wildfire Liability Exposure Pose Unique Considerations for Investors.docx (clearygottlieb.com)

 

Any idea as to why this has suddenly become such an existential issue?

 

@Cigarbutt, I think here too, Mr. Buffett doesn't want to risk losing 500-1000% of the investment in a specific utility due to uncapped jury damages, which could put mothership at risk.

 

He wants statutes on the books to cap those damages for him to invest. 

Edited by LearningMachine
Posted
3 hours ago, yesman182 said:

Vickie’s ability to separate oil from rock

This one made me roll my eyes a little. It is a pretty common talent and that’s the problem. 

Posted (edited)
17 hours ago, ValueMaven said:

WEB sounded almost depressed.


+1 and I wouldn’t be able to write anything if my best friend just died. Re BNSF and BHE, even if we take his comments at face value and assume they might really invest the minimum incrementally (and maybe even take capital out), investors have to keep in mind that ~10 years from now BRK’s assets should be ~60-70%+ about the incremental investment decisions between now and then. It’s still about the cash generation and capital allocation rather than any particular asset. Do you trust Greg, Ajit, Ted and Todd? That’s almost all that matters. And maybe WEB actually lives to 112. 
 

Edited by MMM20
Posted

For those that didn't feel the letter was a little dour or whatever - consider the juxtaposition between prior years' "our managers are all star hall of famers" with this year's "we've had our share of disappointments." 

 

Buffett's well-well worn, "tap dancing to work" with this year's "managing Berkshire is mostly fun and always interesting."  Mostly fun???  I believe him but that is a change in his public tune.  I had to throw some italics in my post to honor the hundreds of italics Buffett used in the annual letter this year.  The man likes italicized words almost as much as Prem likes exclamation points!

Posted

I doubt CA regulators are going to change course due to this letter. CA over-regulates everything not just utilities.

 

So I expect this to eventually lead to a slim down of BHE perhaps even a complete exit.

Posted
1 hour ago, gfp said:

For those that didn't feel the letter was a little dour or whatever - consider the juxtaposition between prior years' "our managers are all star hall of famers" with this year's "we've had our share of disappointments." 

 

Buffett's well-well worn, "tap dancing to work" with this year's "managing Berkshire is mostly fun and always interesting."  Mostly fun???  I believe him but that is a change in his public tune.  I had to throw some italics in my post to honor the hundreds of italics Buffett used in the annual letter this year.  The man likes italicized words almost as much as Prem likes exclamation points!

 

On BHE there was a big change in Buffett's thinking from 2021 to 2023.


2021 AR: "Berkshire will always be building."

 

2022 AR: "And yes, our shareholders will continue to save and prosper by retaining earnings. At Berkshire, there will be no finish line."

 

2023 AR: "Berkshire can sustain financial surprises but we will not knowingly throw good money after bad......

I did not anticipate or even consider the adverse developments in regulatory returns and, along with Berkshire’s two partners at BHE, I made a costly mistake in not doing so."

 

 

Posted

Yeah Mr. Buffett definitely seems to have soured on investing additional sums in BHE and BNSF given the regulatory environment. 

He also highlighted the fact that "Berkshire does not currently pay dividends". Going back to last 5 letters from 2018 onwards, dividend was only reference when Berkshire was receiving dividends from investee or subsidiary.  

May be with rising valuation, reduced investment and acquisition opportunities, rising net equity sales, growing cash flows and cash balances, Berkshire dividend might be coming in 12-24 months. 

Posted (edited)
12 minutes ago, valueinvesting101 said:

Yeah Mr. Buffett definitely seems to have soured on investing additional sums in BHE and BNSF given the regulatory environment. 

He also highlighted the fact that "Berkshire does not currently pay dividends". Going back to last 5 letters from 2018 onwards, dividend was only reference when Berkshire was receiving dividends from investee or subsidiary.  

May be with rising valuation, reduced investment and acquisition opportunities, rising net equity sales, growing cash flows and cash balances, Berkshire dividend might be coming in 12-24 months. 

It’s time. He didn’t get an elephant or significantly deploy capital in 2020. He probably will not get a better opportunity. 
 

He has now shifted from 

we can narrowly beat the S&P to

we can beat the average S&P company. Obviously 20% plus of the S&P is making 20+ ROIC annually and growing revenue at an amazing clip. So that kind of feels like the white flag. 
 

There is still a place for the super safe 8-10% annual gainer but I think they need to pay a dividend. 

 

 

 

Edited by Eldad
Posted (edited)
18 hours ago, Munger_Disciple said:

I found the following comments from Buffett's letter noteworthy:

 

  1. Buffett basically declared that the days of acquiring large private businesses is over due to Berkshire's size & increased competition from PE.
  2. He said "Berkshire does not currently pay dividends". Perhaps preparing shareholders for the day they might have to given the potential issues facing BHE?

 

 

Yes, I pointed out the possibility of a dividend in an earlier post. I hope they don't have to pay a dividend, and find some decent opportunity to reinvest the earnings. But the reality is that if investing big sums in BHE is off the table, Buffett is signaling that they may have to pay a dividend (instead of buying back a ton of shares) if the stock trades closer to its intrinsic value, as it seems to currently. 

Edited by Munger_Disciple
Posted
3 hours ago, anony208 said:

I doubt CA regulators are going to change course due to this letter. CA over-regulates everything not just utilities.

 

So I expect this to eventually lead to a slim down of BHE perhaps even a complete exit.

And yet I would bet money that WB will publicly endorse Gavin N if they replace Biden with him. What exactly his he getting for his allegiance to the kleptocracy? 

Posted
1 hour ago, Eldad said:

And yet I would bet money that WB will publicly endorse Gavin N if they replace Biden with him. What exactly his he getting for his allegiance to the kleptocracy? 


I always assume his top priority by far in any political thing is avoiding nuclear war. It’s been that way for 6+ decades now, right?

Posted
4 hours ago, anony208 said:

I doubt CA regulators are going to change course due to this letter. CA over-regulates everything not just utilities.

So I expect this to eventually lead to a slim down of BHE perhaps even a complete exit.

Then, you may want so send a memo to Omaha to help them realize they are doing some regulated business in California.

ca1.thumb.png.ff520218b274cfb7dec268ca65816cce.png

ca2.thumb.png.e0d9795f656dce4ad8c71c58822e5537.png

Posted (edited)
26 minutes ago, Cigarbutt said:

Then, you may want so send a memo to Omaha to help them realize they are doing some regulated business in California.

ca1.thumb.png.ff520218b274cfb7dec268ca65816cce.png

ca2.thumb.png.e0d9795f656dce4ad8c71c58822e5537.png

Buffett in 2023 letter just issuing an empty threat then? I suppose he learned nothing at all when he finally jettisoned the namesake business(textile) and admitted numerous times that he carried that dead weight for far too long.

 

When did the insurance businesses become part of BHE?

Edited by anony208
Posted
1 hour ago, anony208 said:

Buffett in 2023 letter just issuing an empty threat then?

From my understanding, Mr. Buffett suggests that 'we' have to figure out what 'we' want (for energy delivery to clients) and i guess that should be the result of rational and constructive discussions (with COBF as a microcosm of these discussions). 

-----

In the previous post, you suggest that as a result of "CA over-regulates everything not just utilities", "I expect this to eventually lead to a slim down of BHE perhaps even a complete exit." (my bold)

The logical extension of this statement would be for BRK to exit all regulated businesses in CA.

So why will they continue to write a massive amount of insurance contracts in the "over-regulated" state of CA?

-----

Maybe Mr. Buffett's long term assumption that people in charge will do "the right thing", as recently as in 2008, no longer holds?

Posted

I think it’s a lot easier to stop writing insurance policies when regulations become too onerous, versus energy where the upfront capital is much more expensive. 

Posted
14 minutes ago, LC said:

I think it’s a lot easier to stop writing insurance policies when regulations become too onerous, versus energy where the upfront capital is much more expensive. 

 

💯

Excellent point. Plus BHE projects tend to be very long term projects like the transmission project Buffett referred to in the 2023 letter. 

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