Oxy Pref

[ValueMaven]

Equity warrants from the preferred deal are now in the money!

Berkshire effectively controls 23.5% of the company plus another $10B in that hybrid preferred 

[ValueMaven]

A lot of rumors that Buffett will acquire OXY.  I dont know how I feel about this - given how cyclical this business is, and board-line distress this was just 18 months ago.  That said OXY produces 1% of the worlds oil.  Yes they are rapidly deleveraging and seem to have gotten some common sense.  I dunno - could BHE acquire OXY and merge both...possibly.  OXY has a 20% current FCF yield using current 2022 EPS estimates - so who knows.  

 

 

Edited March 26, 2022 by ValueMaven

[LearningMachine]

4 hours ago, ValueMaven said:

A lot of rumors that Buffett will acquire OXY.  I dont know how I feel about this - given how cyclical this business is, and board-line distress this was just 18 months ago. 

 

Well, remember what happened to BP with the oil spill liabilities.

 

I don't think Buffett would ever expose Berkshire to that risk.  That said, he seems to be interested in the lower-risk Permian over the higher risk Gulf of Mexico oil.  So, if he were to acquire it, he could quickly get rid of the higher risk operations that could put all of Berkshire at risk. 

 

Overall, I think he does want to have X billions of barrels of oil owned by Berkshire for inflation risk without the other liability risk.  One way to do it is to keep owning just a percentage of OXY, and another way is to get Permian out of OXY and own that. 

[Gamecock-YT]

6 hours ago, ValueMaven said:

A lot of rumors that Buffett will acquire OXY.  I dont know how I feel about this - given how cyclical this business is, and board-line distress this was just 18 months ago.  That said OXY produces 1% of the worlds oil.  Yes they are rapidly deleveraging and seem to have gotten some common sense.  I dunno - could BHE acquire OXY and merge both...possibly.  OXY has a 20% current FCF yield using current 2022 EPS estimates - so who knows.  

 

 

 

I think the end game is a tax free exchange

[ValueMaven]

12 hours ago, Gamecock-YT said:

 

I think the end game is a tax free exchange

 

Of what?  Pipeline assets?  The 8% preferred with warrants was a no brainer.  The common stock at $55...not so much

[KPO]

1 hour ago, ValueMaven said:

 

Of what?  Pipeline assets?  The 8% preferred with warrants was a no brainer.  The common stock at $55...not so much

https://www.oxy.com/operations/essential-chemistry/
 

[scorpioncapital]

Yes I think he did that with Phillips 66. He doesn't like cyclical businesses attached to slightly less commoditized chemicals. Not that chemicals are great businesses either but on the scale of volatility they are lower than base commodities.

 

[Spekulatius]

I would be very surprised if Berkshire would want to fully own Oxy. It seems that this would come with a lot of headaches - a deeply cyclical and not that great business over the long run, pot. environmental liabilities m ESG issues of the successor. I just don’t see it happening.

 

He does own enough shares to have quite a bit of effective control, This could mean that he could sell his shares to a suitor or carve out Oxychem which might fit well with Berkshire’s other chemical business.

[ValueMaven]

https://www.bloomberg.com/news/articles/2022-03-30/warren-buffett-occidental-petroleum-investment-goes-big

[CassiusKing1]

“But I found out he really already knew everything. I guess he’s an avid reader, must be a speed reader, and must also have a photographic memory.”

 

LOL!

[ValueMaven]

Funny - that also really stood out to me as well @CassiusKing1

[ValueMaven]

Bought some OXY equity near the close.  I've very interesting in following this one closer.

[Dynamic]

I've been thinking about the modelled carrying value of the OXY warrants, which do count as part of Berkshire's equity portfolio.

 

The OXY 8% preferred stock issued on 8th August 2019 is carried at $10.0 billion redemption value and Occidental can redeem it after 10 years (2029) at their option, for a 5% premium (i.e. $10.5 billion total) plus any unpaid dividends. The warrants expire 1 year after the redemption of the preferred.

 

Berkshire 10-K page K-103 (p118 of the PDF) states that the warrants are valued based on a warrant pricing model at $616 million at year end 2021, with the inputs being:

Expected duration: 7 years

Volatility: 37%

 

I'm a bit surprised at 7 years expected duration, thinking that maybe the warrants would expire on 7th August 2030, which is more like 8.6 years, so I'm instead thinking of 1st Jan 2029 as the effective expiry date. From 31st March 2022 that would be about 6.75 years.

 

I would assume a Black Scholes Call Option pricing model is basically the approach they'd use, so I'm offering up something for those knowledgeable about this to critique and suggest modifications. I can do the math behind Black Scholes, but I'm not a finance professional.

 

I ran a Black Scholes Call Option pricing model calculation using the following inputs to get some idea of the potential increase in modelled carrying value at the end of Q1:

 

$56.74 Closing Price of OXY on 31st March 2022

$59.624 Strike Price

0.0251 Interest Rate (2.51% risk-free rate = something like the 2 year T-bill rate, but should I use 1 year or try to match duration to the expiry of around 6.75 years instead by reading off the yield curve?)

0.557 Volatility (55.7% from a simple Google search of OXY stock volatility, but a few sites gave similar volatility or implied vol figures, though I don't really know where I should obtain this input and over what period it should be measured)

6.757 years to expiry (31st March 2022 to 1st Jan 2029 expressed in years) 

 

The resulting Call Price valuation, which I hope is a reasonably close proxy for a warrant valuation is:

$31.71 per underlying share.

With warrants against 83,858,848.81 shares, Berkshire's holding of OXY warrants should be worth:

$2,659 million at 31st March 2022

according to that model.

 

The $2,043 million modelled value gain this quarter seems reasonable as they finished Q1 very nearly in the money and with an increased volatility input compared to year end 2021.

That additional gain in the portfolio might actually be almost enough to make the Berkshire Equity portfolio break even this quarter (versus a 5% decline in S&P500). Without it, I'd say it's likely to have lost about 1%, which is about 4% outperformance vs the index in Q1.

 

Does anyone think I should change some of the inputs in the model, or does this seem reasonable as the sort of GAAP-compatible valuation model?

 

Obviously, Berkshire's internal thinking is probably more based on fundamentals and various likelihoods of different oil prices and the necessarily sound financial position of the company when Occidental is in a position to sensibly redeem the preferred stock and will completely ignore volatility, but they have to use "industry standard" models like Black Scholes to estimate the fair value of this non-traded warrant on their financial statements.

 

I'd appreciate any input you can provide and I'm happy to recalculate with different inputs as I have the Black Scholes model programmed in, making it easy to change the variables and recalculate.

Edited April 8, 2022 by Dynamic

[Dynamic]

Actually as a sanity check, I just ran the calculation for year end 2021 using the following inputs:

 

$28.99 Closing Price of OXY on 31st December 2021

$59.624 Strike Price (unchanged)

0.01512 Interest Rate (1.512% risk-free rate = 10 year T-bill rate at year end 2021)

0.37 Volatility (37% per Berkshire's 10-K)

7.003 years to expiry (31st Dec 2021 to 1st Jan 2029 expressed in years) 

 

The resulting Call Price valuation, which I hope is a reasonably close proxy for a warrant valuation is:

$5.83 per underlying share.

With warrants against 83,858,848.81 shares, Berkshire's holding of OXY warrants should be worth:

$489 million at 31st December 2021

according to that model.

 

This is a lower figure than Berkshire's $616 million but is at least in the ball-park.

 

Using 7th August 2030 expiry, i.e. 8.600 years to expiry, it's closer:

$7.22 per underlying share,

$605 million holding valuation, which is fairly close.

 

I guess this sanity check gives you some idea how this is only a rough model and I probably won't match Berkshire's model very precisely.

[LearningMachine]

What's going on with Oxy stock today?  Any special news out there? 

[Paarslaars]

Not sure it's really OXY related, all my O&G positions were up 3-6% on Friday and down 3-6% yesterday.

Edited April 12, 2022 by Paarslaars

[ValueMaven]

This OXY investment is turning into one hell of an investment for Berkshire.  Warrents are deeply ITM now and Warren is sitting on a very nice paper gain in the common stock as well.  As of this AM OXY is trading north of $72, which puts the warrents which have a strike of $59 ITM by $13 with 8 years to go.  Total economic exposure is something like ~21% of o/s with the $10 preferred as well.  

[ValueMaven]

Old man is addicted to OXY !!  Just bought another $500M worth.  Hard to keep track what total economic exposure is w/the warrents.  Gotta be over 20% at this point

[ValueMaven]

https://www.kiplinger.com/investing/stocks/604852/could-buffett-buy-out-occidental-petroleum-oxy

[NoCalledStrikes]

WEB may or may not buy out OXY, I don't know.  But while guessing his actions is always a fun parlor game, he is certainly not waiting for it to become investment grade first.  This Kiplinger's quote is the dumbest thing I've read in a while.

 

"We believe there is a good chance billionaire investor Warren Buffett buys the remaining two-thirds of shares of Occidental that he and Berkshire Hathaway do not own once the company becomes investment grade," writes Dingmann, who rates OXY stock at Buy. "

Edited June 26, 2022 by NoCalledStrikes

[gfp]

1 hour ago, NoCalledStrikes said:

WEB may or may not buy out OXY, I don't know.  But while guessing his actions is always a fun parlor game, he is certainly not waiting for it to become investment grade first.  This Kiplinger's quote is the dumbest thing I've read in a while.

 

"We believe there is a good chance billionaire investor Warren Buffett buys the remaining two-thirds of shares of Occidental that he and Berkshire Hathaway do not own once the company becomes investment grade," writes Dingmann, who rates OXY stock at Buy. "

 

Yeah, that was the first thing I thought when I read that article - why would Warren care about OXY being anointed investment grade by outside agencies.  He is either comfortable with the debt / pay down schedule or not.  The thing becomes 'investment grade' the minute Berkshire buys it anyway. 

[Spekulatius]

On 6/22/2022 at 8:38 PM, ValueMaven said:

Old man is addicted to OXY !!  Just bought another $500M worth.  Hard to keep track what total economic exposure is w/the warrents.  Gotta be over 20% at this point

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.

[gfp]

Another $44 million worth last week on 6/23

https://www.sec.gov/Archives/edgar/data/315090/000089924322024236/xslF345X03/doc4.xml

[ValueMaven]

Wild.  I never seen this before out of Berkshire.  

 

[sleepydragon]

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