The warrants exercise price is $22 and it is trading at $31.57. It can be exercised up to Aug 20,2027 and there are anti dilution provisions.
It seems to be a very cheap deep in the money call option. The Jan 2024 $23 call last traded at $30.85. So you get an additional 3.5 years to exercise the warrant for no additional premium.
Seems like a big free lunch. What am I missing?
Option prices are hard to compare precisely because they trade so much less and there is a big spread between the bid and the asking price, but with OXY shares trading at $53 right now, you can get exposure at about the same price, $22+$31 for the warrants, $23+$31 for the calls you mentioned, and $53 for the shares. So the question becomes, do I pay $31 now, plus $23 in 20 months, with the calls, or $31 now, plus $22 in 50 months, or do I pay $53 now, for 3 ways of getting the same upside exposure. With the shares, you get 0.13 per quarter in dividends, which roughly covers the interest on the extra $22-23 in capital you have to spend with the shares. On the downside, the warrants are so far in the money, at $22, that it seems unlikely the shares would trade even lower, where it would start being advantageous to have the warrants or calls instead of the shares.
It may be a free lunch, but it is small one.
The really big question, I think, is how long the current oil bonanza ($100 a barrel prices) will hold up. As a recap, the company is worth about $50b, and had operating income of $5b, $3b, -$1b and $5b in the last 4 years. But last year’s $5b was with the oil price heavily hedged, so operating income and earnings are expected to explode upwards this year. For instance, quarterly operating income last year was $0.2b and $0.6b, $1.5b and $2.3b respectively, as the hedges wore off, with all the hedges running out by the end of the year. It’s not crazy to think Occidental might have $3-4b per quarter in operating income this year, maybe more, since the company anticipated that all the hedges would have run off by the end of 2021. On the other hand, if oil prices drop back down to $50 by the end of the year, it’s not so much of a deal.
Of course, if we could predict oil prices, we wouldn’t be opining on fool.com, we would be [insert favourite pastime here]. I suspect Uncle Warren is already buying more shares hand over fist this week, so I guess that’ll be enough exposure for me that way.