Oxy Pref

[ValueMaven]

29 minutes ago, sleepydragon said:

Wondering if WEB is buying aggressively less of investment reason but more of buying insurance that oil could spike way way higher.

 

There are a lot easier ways to do that for Berkshire if that was his view ... 

[hasilp89]

On 6/27/2022 at 8:06 AM, Spekulatius said:

Oxy is hard drug to withdraw from, once you get hooked on it. I think WEB will find out likewise, if he wants to exit this investment.

 

I don't think he is going to swallow OXY, there is too much cyclicality in this and it likely won't be a great business in the long run.

Given he typically doesn’t sell it doesn’t seem like that would be a risk? With 15b of fcf coming in just the next 12m, deleveraging and buybacks means he’ll own more without doing anything. O&g isn’t going anywhere in the next 10 years. Could have a few more years like this in that timespan. Could be his best one yet. 

[aws]

I would lean toward him not wanting to buyout Oxy if for no other reason then it burns the option value of the warrants. The warrants don't expire until Oxy redeems all the preferreds, and that can't happen until 2029 at the earliest. What's a 7 year ATM call option on 84 million shares of OXY worth? In a quick glance at their financials they don't seem to break it out, but it must be at least 2 billion option value.

 

Now, it does make it easier to acquire the whole company when you effectively already own an extra 8% of the diluted shares outstanding, but unless he thinks there is a control premium that he could achieve worth substantially more than the option value he gives up, then I think he's happy enough just owning a minority stake.

[Spekulatius]

14 hours ago, aws said:

I would lean toward him not wanting to buyout Oxy if for no other reason then it burns the option value of the warrants. The warrants don't expire until Oxy redeems all the preferreds, and that can't happen until 2029 at the earliest. What's a 7 year ATM call option on 84 million shares of OXY worth? In a quick glance at their financials they don't seem to break it out, but it must be at least 2 billion option value.

 

Now, it does make it easier to acquire the whole company when you effectively already own an extra 8% of the diluted shares outstanding, but unless he thinks there is a control premium that he could achieve worth substantially more than the option value he gives up, then I think he's happy enough just owning a minority stake.

I think it's probably important to look back in the late 70's or early 80's. Buffett was involved in a lot of energy / Oils and gas names back them - like Amerada Hess. He traded those quite frequently and successfully, they were not LT holds as all.

Later past 2000 his track record trading energy became much more murky, he dunked on Exxon and COP, but had a home run with Petrochina.

[KPO]

3 hours ago, Spekulatius said:

I think it's probably important to look back in the late 70's or early 80's. Buffett was involved in a lot of energy / Oils and gas names back them - like Amerada Hess. He traded those quite frequently and successfully, they were not LT holds as all.

Later past 2000 his track record trading energy became much more murky, he dunked on Exxon and COP, but had a home run with Petrochina.

Yeah, my thinking here is that he either rides it as a hedge for a while then peels off a division (most likely OxyChem) in an exchange or he sells once he’s ridden it up enough and potentially oil inflation peaks. That said, my own personal bias is that ESG and things like zero emission mandates by 2035 keep oil well over extraction cost.
 

Rhetorical question: do tires not cause a form of emissions, particularly on much heavier EVs?

[yesman182]

6 hours ago, Spekulatius said:

I think it's probably important to look back in the late 70's or early 80's. Buffett was involved in a lot of energy / Oils and gas names back them - like Amerada Hess. He traded those quite frequently and successfully, they were not LT holds as all.

Later past 2000 his track record trading energy became much more murky, he dunked on Exxon and COP, but had a home run with Petrochina.

I think one big difference now is the size of Berkshires position.  Although OXY seems to have crazy high trading volumes, it will be hard for Berkshire to dance out of these large positions and then into something else. I personally hope this is a long holding with decent returns over a cycle. 

[Spekulatius]

12 hours ago, KPO said:

Yeah, my thinking here is that he either rides it as a hedge for a while then peels off a division (most likely OxyChem) in an exchange or he sells once he’s ridden it up enough and potentially oil inflation peaks. That said, my own personal bias is that ESG and things like zero emission mandates by 2035 keep oil well over extraction cost.
 

Rhetorical question: do tires not cause a form of emissions, particularly on much heavier EVs?

EV's are the best thing that ever happened to tire companies. It's seriously bullish - all that torque from the electric or hybrid power trains makes for a lot of wheelies on the roads.

[KPO]

5 hours ago, Spekulatius said:

EV's are the best thing that ever happened to tire companies. It's seriously bullish - all that torque from the electric or hybrid power trains makes for a lot of wheelies on the roads.

They also act as a hedge of sorts if you have a lot of O&G exposure like I do. Do you have a preferred tire company to invest in? I own a little GT, but don’t love the balance sheet. 

[Spekulatius]

28 minutes ago, KPO said:

They also act as a hedge of sorts if you have a lot of O&G exposure like I do. Do you have a preferred tire company to invest in? I own a little GT, but don’t love the balance sheet. 

I don't own any, but really like Pirelli (PIRC.MI). They are in the premium tire segment and have some of the highest margins. I also follow Michelin loosely and owned it in the past.

 

Tires are not that great of a business because it needs a lot of Capex and working capital, so you really want to be in the highest margin segment of the FCF to owners is going to be non-existent.

Edited June 30, 2022 by Spekulatius

[maxthetrade]

Michlin's indestructible tires look pretty, interesting. That would finally be a real innovation in the tire industry.

 

https://www.fastcompany.com/90359254/michelins-ingenious-new-tires-ensure-youll-never-get-a-flat-again

 

[NnnnotSoSmart]

OXY Buying Continues:

 

Mr Buffett buys 10.7 Million additional shares for $626 Million.  Average price paid $58.65/share.

 

https://www.sec.gov/Archives/edgar/data/0001067983/000089924322024865/xslF345X03/doc4.xml

[MCR]

[valueinvesting101]

It seemed like $60 was a threshold for purchasing Oxy shares.  Today price was well below $60 and yet very few purchases, may be BRK doesn't want to go above 180 million shares. 

[ander]

Filed that he bought another 1.9 mil shares. Did not buy as aggressively as he did in previous days. At 181.6 million shares.

[scorpioncapital]

Wonder why he is slowing down the buying even though it is within his juicy target range. Does it imply not 100% confidence in a full buyout? Another reason? No rush because range-bound? No desire to go above 20% ever?

[yesman182]

5 hours ago, scorpioncapital said:

Wonder why he is slowing down the buying even though it is within his juicy target range. Does it imply not 100% confidence in a full buyout? Another reason? No rush because range-bound? No desire to go above 20% ever?

I think the overall trading volume is down in OXY, so he is still getting the same % of daily trading, but simply has less shares to buy. I didn't look closely but I suspect this is what is happening. 

[ValueMaven]

Cant wait to see the FMV valuation of the warrents using BSM assumptions...should be in the next Q ... those warrents were a real sweet kicker!!

[ValueMaven]

Warrents are now ITM by about $5 per share, with another 8 years to go.  Berkshire effectively controls ~26% of OXY's common stock + $10B preferred at 8%. WOW.

I do not have time to play around with BSM assumptions for the warrents - but these have to be worth many billions - figure at least $5-$7B alone.  These warrents were issued basically for free as part of the preferred deal.  

Edited July 25, 2022 by ValueMaven

[ValueMaven]

OXY stock is on fire - north of $65 and the warrents are now ITM by over $6 per share w/another 7-8 years to go.  

[CassiusKing1]

Methinks the "Old Man" still has it.

[ValueMaven]

the warrants alone using some very basic assumptions are worth at least $8-$9B...maybe as high as $11-$12B ... they are $6ITM currently.  Using today's price, strike of $59, and 7 years till expiration you get a rough value of between $14 - $16 per warrant ... Berkshire owns 85M warrants ...

[gfp]

3 minutes ago, ValueMaven said:

the warrants alone using some very basic assumptions are worth at least $8-$9B...maybe as high as $11-$12B ... they are $6ITM currently.  Using today's price, strike of $59, and 7 years till expiration you get a rough value of between $14 - $16 per warrant ... Berkshire owns 85M warrants ...

 

Since the warrants can't really be transferred to anyone else to capture the time and volatility premium before they are exercised, they really only end up being worth their in-the-money intrinsic value (currently a little over $500 million).  Warren gets the optionality, which has value, but can't receive payment for that value.  I'm sure the accountants will still value them under Black Scholes and a set of assumptions about time-to-expiry and mark them accordingly - but that value will never show up as money in the bank.

[MCR]

[ValueMaven]

Wild!!

[scorpioncapital]

Amazing, although it seems he is buying very slowly despite it dipping below 60 on volatility. Truly wonder if he will go for the whole thing or if he's waiting for some macroeconomic signals.