Buffett bet on oil looking prescient

European Union leaders have agreed on a plan to block more than two-thirds of Russian oil imports.

https://www.bbc.com/news/world-europe-61638860

Brent and WTI crude trading over $118/bbl as I type.

Chevron and OXY will gush cash in coming months if these commodity price levels are maintained.

OXY completely unhedged. Any price increase goes straight to bottom line.

Chevron claim they will buy back more than 25% of shares outstanding between now and 2026 if a Brent price of $75/bbl or higher is maintained over the time period. Looking good so far.

https://chevroncorp.gcs-web.com/static-files/768cade8-1672-4…

Both companies will be aggressively returning capital to shareholders.

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OXY just touched $73/share pre market putting the warrants, with a strike price of $59.6, in the money by $13 - with 8 more years still to go. Total OXY exposure is ~ 22% of outstanding plus the preferred paying 8% as well.

Not too shabby.

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OXY just touched $73/share pre market putting the warrants, with a strike price of $59.6,
in the money by $13 - with 8 more years still to go. Total OXY exposure is ~ 22% of outstanding plus the preferred paying 8% as well.

I haven’t been paying close attention to the numbers.
Assuming the warrants are ultimately exercised, what’s our total share count and weighted average entry price?
(Excluding the price reduction from coupons on the preferred)

For those who do track such things, I also have the same question for SNOW!

Jim

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OXY just touched $73/share pre market putting the warrants, with a strike price of $59.6,
in the money by $13 - with 8 more years still to go. Total OXY exposure is ~ 22% of outstanding plus the preferred paying 8% as well.

I haven’t been paying close attention to the numbers.
Assuming the warrants are ultimately exercised, what’s our total share count and weighted average entry price?
(Excluding the price reduction from coupons on the preferred)

For those who do track such things, I also have the same question for SNOW!

Jim

I haven’t calculated the exact cost basis of OXY, but it is approximately $8.2 Billion spent to acquire 143,162,392 shares of stock - somewhere in neighborhood of 57.5/sh average cost (estimated - this could be off by a couple bucks). Plus $5 Billion notional cost basis of warrants to acquire 83.859m shares at 59.624/sh.

So total notional exposure to OXY is 227,021,241 shares at something like a 58.3/sh. avg cost - or about $13.25 Billion “cost basis” if they warrants were exercised.

At $70/share the position would be worth $15.89 Billion if the warrants were fully exercised (which would cost $5 Billion). I’m not sure what the fully diluted share count of OXY would be at that point since there are the Berkshire warrants, the Icahn-induced publicly traded warrants and some hypothetical future buyback. I think it’s over 20% notional of OXY.

Of course Berkshire also has the $10 Billion of 8% preferred that would need get a 10% premium to redeem. The warrants have an expiration date one year after the last of Berkshire’s pref shares are retired. And OXY didn’t sound like it was going to retire the BRK pref all at once. It sounded like they would put some capital towards that Pref and some towards the common repurchase once they got their debt down to where they want it.

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European Union leaders have agreed on a plan to block more than two-thirds of Russian oil imports.

Let me guess. “Freeze in the dark.” LOL

In another note, in our teens, my brother and I agreed on a plan to have wild sex with a bunch of Hollywood starlets.

I haven’t calculated the exact cost basis of OXY, but it is approximately $8.2 Billion spent to acquire 143,162,392 shares of stock - somewhere in neighborhood of 57.5/sh average cost (estimated - this could be off by a couple bucks). Plus $5 Billion notional cost basis of warrants to acquire 83.859m shares at 59.624/sh.

So total notional exposure to OXY is 227,021,241 shares at something like a 58.3/sh. avg cost - or about $13.25 Billion “cost basis” if they warrants were exercised.

At $70/share the position would be worth $15.89 Billion if the warrants were fully exercised (which would cost $5 Billion). I’m not sure what the fully diluted share count of OXY would be at that point since there are the Berkshire warrants, the Icahn-induced publicly traded warrants and some hypothetical future buyback. I think it’s over 20% notional of OXY.

Of course Berkshire also has the $10 Billion of 8% preferred that would need get a 10% premium to redeem.

Thanks for that recap. We’ll see if there are some additional purchases, with a week in May (May 8 to 12) where the price stayed between $58 and $60, so if Buffett intended to add another big chunk, that was a good chance to do so.

The other point I would make about this investment is that there are really 3 qualitatively different components that you have mentioned: the preferred shares and the warrants, purchased in 2019, and the recently purchased shares.

Of course the preferred shares are extremely valuable, particularly now that Occidental’s finances have been rectified by a couple of very profitable years. The wrath of Icahn, when the deal was made, is pretty good evidence of what a great deal this was.

As for the shares, it is not quite right to combine the warrants (allowing for purchase of shares at about $60) with the shares (purchased at around $58). It’s even a bit better than that, because Berkshire has the right but not the obligation to buy the shares at that price. Of course we hope that the investment works out, and that the warrants get exercised. But there is an alternative future, where oil prices drop fast, either from increased production or because the world goes into recession, and oil companies like Occidental see falling share prices, perhaps well below $60 in Occidental’s case. In that scenario, there would be a loss from the recently purchased shares but not from the warrants. Owning $60 warrants is sort of liking owning shares plus a put option so their value can’t go below $60. You could estimate that additional value by looking at how much long-term $60 put options are trading at (although the term is not identical), and it looks to me like that would be an additional $12 per share, on top of the roughly $10 per share gains that this investment has already generated, at least on paper.

Regards, dtb

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Thanks for that recap. We’ll see if there are some additional purchases, with a week in May (May 8 to 12) where the price stayed between $58 and $60, so if Buffett intended to add another big chunk, that was a good chance to do so.

Yeah, we don’t have to speculate on if there were purchases during that period - I am including those purchases in the summary above. Berkshire has to file a Form 4 within 3 days of any purchases (or sales) at this point.

https://www.sec.gov/Archives/edgar/data/0000797468/000089924…

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Of course Berkshire also has the $10 Billion of 8% preferred that would need get a 10% premium to redeem…

Again, forgive my laziness for not looking it up myself, but just so I’m 100% certain:
In this case the warrants and the preferred are entirely separate securities?
i.e., they are not convertible preferred?

Jim

As for the shares, it is not quite right to combine the warrants (allowing for purchase of shares at about $60) with the shares (purchased at around $58). It’s even a bit better than that, because Berkshire has the right but not the obligation to buy the shares at that price. Of course we hope that the investment works out, and that the warrants get exercised. But there is an alternative future, where oil prices drop fast, either from increased production or because the world goes into recession, and oil companies like Occidental see falling share prices, perhaps well below $60 in Occidental’s case. In that scenario, there would be a loss from the recently purchased shares but not from the warrants. Owning $60 warrants is sort of liking owning shares plus a put option so their value can’t go below $60. You could estimate that additional value by looking at how much long-term $60 put options are trading at (although the term is not identical), and it looks to me like that would be an additional $12 per share, on top of the roughly $10 per share gains that this investment has already generated, at least on paper.

Yes, Jim asked something along the lines of ‘assuming the warrants are fully exercised.’ Also, in addition to the optionality mentioned above, we get to keep our $5 Billion to use for other stuff in the meantime, so you would also factor in the value of the implicit loan of that $5 Billion (the cost of leverage) for whatever the term of the warrants ends up being. Nobody knows the warrant’s duration upfront. Berkshire is forced to estimate the expiry date for accounting purposes and currently uses 8/8/2030 as the “estimated” expiration date in their accounting.

FWIW, Berkshire marked the OXY warrants to $19.54 / share at the end of Q1. This was what the option pricing model spit out with a 8/2030 expiration date and whatever implied volatility they used. OXY closed at $56.74 that day.

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Again, forgive my laziness for not looking it up myself, but just so I’m 100% certain:
In this case the warrants and the preferred are entirely separate securities?
i.e., they are not convertible preferred?

Jim

Yes, they are entirely separate except for the fact that the warrant’s duration is determined by when the last of the preferred are fully redeemed. Once the last share of the Pref is redeemed, the warrants expire one year later.

Of course, warrants have value when issued - nothing is “free” in accounting for this type of thing. So the cost basis assigned to the preferred is not really $10 Billion. It is $10 Billion minus whatever value black scholes spit out for the warrants on the issue date.

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In this case the warrants and the preferred are entirely separate securities?
i.e., they are not convertible preferred?


Yes, they are entirely separate except for the fact that the warrant’s duration is determined by when the last
of the preferred are fully redeemed. Once the last share of the Pref is redeemed, the warrants expire one year later.

Thanks!

Hmmm, I’m liking this “lazy” thing.
Maybe crowdsourcing investment research makes sense if, instead of having a futures market, you just use division of labour…

Jim

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