Oxy Pref

[ValueMaven]

This is not an insignificant investment for Omaha.  Wouldn't touch the stock (OXY) - but I'd imagine Omaha is breathing easier with the common shares more then doubling over the last month or so.  Has anyone tried to triangulate a fair-market value for these?  I guess you'd have to look at a blend of debt and equity to come-up a reasonable valuation.  I'd be interested to see how OXY continues to pay BERK - either in cash, or stock going forward. 

[thepupil]

https://www.bamsec.com/filing/156459020052144?cik=1067983

 

see page 21,

9/30, berkshire valued the pref at $8.1B and the warrants at $1.5B

6/30 this was $7.8B (roughly same on warrants)

3/30 this was $5.5B ($2.3B on warrants, higher because of higher vol input i guess even though their likelihood of being ITM was lower in March)

 

Right now, I'd guess the pref is worth par (OXY 2049's yield 5.5% so 2.5% pick up for being subordinated / not transferable / not cash pay seems fair = 8% = fair = pref worth par), too lazy to value the warrants.

 

the callability in 10 years at $105 caps how much more than par the pref can be worth, making it have less convexity than a long duration fixed income investment. because of this and the subordination, i could hear an argument for lower (80-90 cents?) but who knows.

[Xerxes]

Why BRK didn’t insist on getting cash only as interest payment when it invested in preferred ?

[ValueMaven]

From my understanding - and it is a fair point - if OXY wants to pay BERK in OXY stock - it is somewhat punitive.  I believe they have only done this once and it was at an ~8.5% yield (via equity)  See below:

 

“Any shares of Common Stock so issued shall be valued for purposes of this Section 4(a) at 90% of the average of the VWAP per Common Share over each of the ten (10) consecutive Trading Days commencing on the Trading Day immediately following the date on which the applicable dividend is declared.”

[thepupil]

From my understanding - and it is a fair point - if OXY wants to pay BERK in OXY stock - it is somewhat punitive.  I believe they have only done this once and it was at an ~8.5% yield (via equity)  See below:

 

“Any shares of Common Stock so issued shall be valued for purposes of this Section 4(a) at 90% of the average of the VWAP per Common Share over each of the ten (10) consecutive Trading Days commencing on the Trading Day immediately following the date on which the applicable dividend is declared.”

 

I think the option to pay in stock is good from a credit perspective as it gives OXY a way to issue equity in bad times and probably allows OXY to argue that the interest on the prefs need not be included in any kind of credit metric, just a speculation, no basis in fact for this, i feel like 5XEBITDA would know this.

[5xEBITDA]

From my understanding - and it is a fair point - if OXY wants to pay BERK in OXY stock - it is somewhat punitive.  I believe they have only done this once and it was at an ~8.5% yield (via equity)  See below:

 

“Any shares of Common Stock so issued shall be valued for purposes of this Section 4(a) at 90% of the average of the VWAP per Common Share over each of the ten (10) consecutive Trading Days commencing on the Trading Day immediately following the date on which the applicable dividend is declared.”

 

I think the option to pay in stock is good from a credit perspective as it gives OXY a way to issue equity in bad times and probably allows OXY to argue that the interest on the prefs need not be included in any kind of credit metric, just a speculation, no basis in fact for this, i feel like 5XEBITDA would know this.

 

Whether or not pref-related interest is included in a credit metric covenant would be laid out in the Company's credit agreement / indenture, but most likely the CA. If I had to guess, it won't be included because 1) interest can be toggled between cash and stock, and 2) pref is only debt-like and not a true loan or bond, and most financial covenants only seek to govern metrics related to pure debt securities. I haven't looked at OXY, but would be surprised if the pref can freely opt between paying cash or stock with no other penalties. I've heard of prefs / converts with structures like this, but in practice they're rare. Even rarer are those that promise cash but can jam you with stock upon maturity, but have seen.

[gfp]

Berkshire has settled on this exact formula for preferred investments over the years because it allows the investee to count the investment as equity.  They modified the BAC pref after the fact to make it quasi-perpetual to make sure it continued to count toward capital with regulators.  There is always a penalty for paying in stock, a slight (~10%) discount to VWAP leading up to dividend and/or a bump-up in rate (~50-100 bps).  I would assume the idea is that this would allow Berkshire to liquidate the dividend stock at about the cash value of what would have been the cash dividend payment.  This is what they did with OXY the one quarter OXY paid in stock.  And since the stock dividend is based on the VWAP for some known number of days leading up to the dividend payment, Berkshire can - and sometimes does - pre-sell the stock they are set to receive so they end up with essentially a zero position on the day of the payment.  With little risk since VWAP is something Berkshire can ask for each day with their brokers.

 

Berkshire has been doing these deals for so long it has become a formula where they can just tell MT&O to write it up boilerplate.  "give 'em the Goldman with the Dow Chemical twist" or whatever

 

Exceptions would be the sole-lender stuff like Lee Enterprises or SRG.  Those are structured totally differently and the Lee loan has an interesting variation of the Net Worth Sweep, where Lee has to pay down principal anytime they are left with over $20 million cash at the end of a quarter.

[ValueMaven]

https://www.houstonchronicle.com/business/energy/article/Oxy-expects-higher-asset-sales-to-pay-down-debt-16364919.php

[ValueMaven]

Wow.  Right near the $60 strike Berkshire has...plus another 8 years to go. At one point 18 months ago these warrents were 90% OTM

I see the preferred is now carried at $10.7B.  8% coupon plus the warrents struck at $60 per share.  

OXY up about 17% right now on huge volume.  This is turning into a classic Warren investment & looks to be a very solid energy related deal for Berkshire!

[gfp]

The publicly traded 22 strike warrants Icahn pushed for aren’t doing too badly either.  Much like the BAC deal, there were at least some similar if not identical securities trading publicly. 
 

how is IEP not catching any bid considering its top holdings and an active HBO doc?  Must be crazy overvalued?  I never quite wrapped my head around the strange distribution but knowing Carl it’s somehow genius for him. 

[gfp]

Cross posting from the OXY forum, since Berkshire filed new information on a stock that happens to be one of the top gainers on the exchange:

_____________________________________________________________--

I hadn't realized that in addition to the warrant strike price being reduced to 59.624 (from 62.50 orig.), the number of warrant shares was also increased from 80m to 83,858,848.81.

 

Berkshire filing out just now casually mentioning that they control 113.67 million shares of OXY (almost 30 million shares in addition to the warrant shares)

 

https://www.sec.gov/Archives/edgar/data/797468/000119312522066054/d317667dsc13g.htm

 

  Quote

The Berkshire Warrants were issued on August 8, 2019 initially for 80,000,000 million shares of Common Stock at an exercise price of $62.50 per share, but on June 26, 2020, Occidental’s Board of Directors declared a distribution to its common shareholders of warrants to purchase additional shares of Common Stock, which distribution resulted in an anti-dilution adjustment to the Berkshire Warrants that lowered the exercise price to $59.624 per share and increased the number of shares of Common Stock issuable on exercise of the Berkshire Warrants to 83,858,848.81. The Berkshire Warrants have not been exercised.

 

 

edit:  it's funny that Icahn starts selling large blocks and suddenly Berkshire has 30m shares we didn't know about and they didn't own at year end:

https://www.sec.gov/Archives/edgar/data/0000797468/000153949722000554/n2779_x32-sc13da.htm

(scroll all the way to the bottom for recent sales by Icahn - too early Carl!)

[ValueMaven]

I wouldnt touch IEP with a 10-foot pole ... 

[jbwent63]

Now over 91 million shares plus the warrants. Warren was busy this week!

 

https://www.sec.gov/Archives/edgar/data/797468/000089924322009579/xslF345X03/doc4.xml

[thepupil]

19 hours ago, ValueMaven said:

I wouldnt touch IEP with a 10-foot pole ... 

amen 

[Spekulatius]

On 3/4/2022 at 6:45 PM, ValueMaven said:

I wouldnt touch IEP with a 10-foot pole ... 

IEP trades far above NAV as far as I can tell, but does have this sucker yield. You also get a K-1.

[yesman182]

I saw adds yesterday that Vivki Hollub was going to do an interview on cnbc. I can't find the video anywhere, did that interview happen? Or did she skip the interview so she didn't need to answer questions about Berkshire?

Edited March 9, 2022 by yesman182

[ValueMaven]

I was unaware and didnt see her this AM

[CorpRaider]

10 hours ago, Spekulatius said:

IEP trades far above NAV as far as I can tell, but does have this sucker yield. You also get a K-1.

Yeah I blew it by not buying a decade ago, but he's too old, there's zero succession, and I don't vibe with Brett.

Edited March 10, 2022 by CorpRaider

[Xerxes]

I don’t know about CNBC but she has one with Bloomberg from 5 days ago. It is on YouTube. 
 

On Icahn, something tells me that Buffett was always interested to expand on Oxy but wasn’t going to show his hand with Icahn there. When Icahn left or was leaving, he jumped on it ….

[yesman182]

9 hours ago, Xerxes said:

I don’t know about CNBC but she has one with Bloomberg from 5 days ago. It is on YouTube. 
 

On Icahn, something tells me that Buffett was always interested to expand on Oxy but wasn’t going to show his hand with Icahn there. When Icahn left or was leaving, he jumped on it ….

Thanks for sharing. Interesting point about Icahn. I was wondering why buffet didn't call Icahn and offer to buy his entire block, for more than it traded in the market. I feel like Buffet could have purchased Icahn's shares for less then what he paid in the market, but I am sure Buffet is smarter than me, so probably not.

Edited March 15, 2022 by yesman182

[ValueMaven]

really dump question - but why didnt Warren buy aggressively when prices where in the $10 - $15 range and the company was in serious trouble??  Have things changed THAT much vs. the price apperication to buy aggressively in the mid-$50s.  Which is a better risk-reward, OXY at $14 when oil was $40, or OXY at $55 when oil is $110???? 

[thepupil]

deleted because used wrong data

Edited March 15, 2022 by thepupil

[yesman182]

29 minutes ago, ValueMaven said:

really dump question - but why didnt Warren buy aggressively when prices where in the $10 - $15 range and the company was in serious trouble??  Have things changed THAT much vs. the price apperication to buy aggressively in the mid-$50s.  Which is a better risk-reward, OXY at $14 when oil was $40, or OXY at $55 when oil is $110???? 

I think for a while in 2020, he was being conservative because of covid. And he could buy his own stock at what was certainly a good value. I don’t think he wanted to get into a chest beating match with Carl about the correct direction of the company. 

[Xerxes]

I have little understanding/knowlege of Oxy or its assets or what supposedly Buffett read in the earning call transcript that he didnot know about Oxy that was new, but just from the outside looking in, it seems this is not just an "oil-tracker" investment. He could have those buy investing in more liquid and deeper pool of assets like Chevron or Exxon.

 

Maybe he seeks some sort of passive control on these O&G assetes and is willing to pay up for that control premuim. But none of that could have happened with Icahn around. I just dont think it is a concidence.

[scorpioncapital]

7 hours ago, ValueMaven said:

really dump question - but why didnt Warren buy aggressively when prices where in the $10 - $15 range and the company was in serious trouble??  Have things changed THAT much vs. the price apperication to buy aggressively in the mid-$50s.  Which is a better risk-reward, OXY at $14 when oil was $40, or OXY at $55 when oil is $110???? 

 

I think you answered your question. At $10 it was in trouble. There could even be the risk of bankruptcy, or at least underperformance. Look at $SRG. Berkshire was a lender and didn't turn out. Oxy turned out. Perhaps it was Ukraine, perhaps it was just more economies of scale. I think Buffett will always make the conservative risk-adjusted decision , especially when buying common level equity for Berkshire account. I've noticed he sometimes buys preferred or debt when he doesn't want to own equity when he's not absolutely sure to prevent underperformance even if he thinks bankruptcy is not likely. I think what he read in the transcript was the positive attitude of management toward debt. I think it is or will become clear that debt is a killer. He has said it many times. If used in a wrong way or to fund a cyclical business, or overdoing it, it can be ruinous. Today many companies are undisciplined to debt and will only see the consequences in time via either an acute distress event or lower valuation as enterprise value and interest costs cut into earning power.

So when oxy management said they learned from their mistakes of using debt in the Anadarko acquisition I think that is what was music to his ears.

Edited March 15, 2022 by scorpioncapital