Let us slightly rephrase the question, did Berkshire pay higher prices for A-shares?
The below from Bloomstran.
BRK paid an average $425,454 per A share during the quarter or $283.63 per B equivalent. More than 99% of the shares bought during the quarter were A shares.
Will Berkshire buyback’s focus solely/ mainly only on A-shares? Is buyback’s main purpose is to strengthen the control of those who own A-shares or return capital to shareholders?
My understanding is that these terms have been in place since the original purchase. And have been applied in past purchases of BHE.
I have assumed so, but it’s not always clear exactly how prescriptive a given formula is without reading it and seeing how it was ultimately applied.
The mere addition of the phrase “or as mutually agreed” can change a lot.
And circumstances change. As an example, I doubt it was foreseen that a material fraction of the value would end up being the BYD stake.
Berkshire recorded a charge of $362 million to capital in excess of par value for the excess of
the consideration paid over the carrying value of the acquired noncontrolling interest.
Analysis of this and past transactions may offer insights into how Buffett values BHE.
Not so sure about that…it’s merely the bookkeeping adjustment needed to handle the portion of the purchase price in excess of the book value of the shares purchased, no?
A goodwill item. But doubly confusing because the assets were already consolidated, but not owned.
And further confusing because BHE bought the shares back, Berkshire didn’t buy them.
Among other side effects of that, the Scott group of minoroty investors has increased its ownership in BHE by a hair.
Jim
Only $1 Billion of share repurchases and little stock bought outside of the OXY shares we already knew about.
I’m a little perplexed and disappointed by this. Considering how much cash was deployed in late February and March, I was hoping for more buying activity when the market sold off even more in the second quarter, especially in June.
There’s this…?
WEB “You should know, however, that we have no interest in supporting the stock and that our bids will fade in particularly weak markets.”
I think he won’t buy when it’s above his estimate of ‘discount to IV’ (April), or when it’s in a quick downtrend (April and May).
Why not more in June/July? Don’t know. There’s enough cash, it seems.
My pet hypothesis: WEB has a limit on how much cash he is comfortable with Berkshire holding. $150Bn is too much. $100Bn is OK. There’s only so much needed for any conceivable acquisition. Above some amount he will use for buybacks, as long as the price is reasonable. Below the limit he will wait for good opportunities and maybe use incoming cash for buybacks.
There’s this…?
WEB “You should know, however, that we have no interest in supporting the stock and that our bids will fade in particularly weak markets.”
I think he won’t buy when it’s above his estimate of ‘discount to IV’ (April), or when it’s in a quick downtrend (April and May).
Why not more in June/July? Don’t know. There’s enough cash, it seems.
Thanks, AdrianC. When Buffett said Berkshire’s bids for its own stock “will fade in particularly weak markets,” I figured he meant that Berkshire would be deploying cash into other attractive opportunities that were beaten down even more in the weak market. However, besides buying a little more OXY, that does not really appear to have been the case in June. Maybe Buffett just didn’t see any bargains in that time period, despite the market being beaten down. Maybe the only major bargain he has seen this year was in oil stocks back in February. Or maybe the market wasn’t down long enough in June for Berkshire to deploy large amounts of cash–the depths in June lasted only a few days. In any event, considering the $40B+ deployed in a short amount of time in February and March, I was surprised at the relative lack of activity in the latest quarter when the market was lower.
“In any event, considering the $40B+ deployed in a short amount of time in February and March, I was surprised at the relative lack of activity in the latest quarter when the market was lower.”
Agree, this was very surprising. Doubtful, but If oil prices drop another 15-20% with a slowdown and an associated drop in OXY price, might we envision a potential acquisition only necessitating $40-50B? One can dream anyway!
Doubtful, but If oil prices drop another 15-20% with a slowdown and an associated drop in OXY price, might we envision a potential acquisition only necessitating $40-50B? One can dream anyway!
My question remains as to why WEB would want to wholly own a capital intensive business in a highly competitive industry that is notably cyclic. And is unregulated - unlike railroads and utilities. So no guarantees on returns on capital.
If he’s in it as a stock for a good ride on oil and gas prices as long as they last, that’s just dating. Like he’s doing with Chevron. If he owns all of it, that’s a marriage for a company that doesn’t believe in divorce.
I can understand the 20% ownership for the tax advantages. A total ownership doesn’t fit with Buffett’s past in terms of O&G investing.
What is the counter argument for total ownership?
“What is the counter argument for total ownership?”
texirish,
I always respect your opinion and am certainly not well informed on the complicated oil and gas/ energy businesses as you are. I completely trust the informed opinions of those in Omaha. These counter argument thoughts come to mind but may reveal my ignorance:
Supply /Demand seems favorable for decades.
Valuable growing diverse assets with sizable recurring annual FCF.
Quality hedge for BRK given so many subs highly dependent directly or indirectly on oil.
Vicki H. seems to be a very seasoned and skilled manager who is well liked by WEB.
Rare chance to capture another elephant to increase key recurrent op earnings/ per share in a business BRK understands.
Unlimited access to BRK’s enormous and growing capital for further growth.
Broaden the diversity of BHE.
Green energy/Carbon opportunities growth with incentive tax credits.
Investment in America.
Potentially further improve relations with powerful government officials.
WEBspired
And I appreciate your response.
I do think the industry offers some good opportunities for the next few years. But eventually supply-demand will come into balance. And then over-correct if history is any guide - albeit the industry does seem to be trying to cut back on those wild swings. There’s an old oil patch prayer that says: “God, please send us another oil boom. We promise we won’t “screw” it up this time.” Maybe this time will be different. But it is the national oil companies that fundamentally control supply. OPEC+1 - the Middle East and Russia. Private oil companies are basically price takers.
My point is that there are many, many opportunities to invest in O&G without having to own it for the long run. And you preserve your option to get out if it turns down. There’s nothing unique about OXY versus many other companies. If WEB sees something special about them, he understands the industry far better than I do. There’s no evidence he even knew about them until BAC turned them down for a loan and sent them his way.
This is fundamentally a commodity industry. Capital intensive with an unexciting ROCE except in boom times. Over the cycle, not much above the cost of capital unless you have some major competitive advantages. OXY is well positioned in the Permian, but not in the downstream and chemicals. And it has far, far lesser capabilities to take on very large projects than the super-majors, particularly XOM and CVX. Think R&D, big project management capabilities, worldwide experience over decades.
There’s going to have to be hundreds of billions of dollars invested worldwide in the future to just sustain current production levels as existing fields decline. And more if you have to restructure the industry. And I haven’t mentioned the exposure to geo-politics.
So, if it’s a bet on O&G pricing, you don’t have to make that a standing bet. Why do it?
texirish,
Thanks for your sharing your thoughts and insight which also helps to understand BRK’s vision and thinking. Nice to have an open board like this to expand the mind and rethink one’s views in this strange ever-changing world and market conditions.
Texirish wrote on OXY:
"My point is that there are many, many opportunities to invest in O&G without having to own it for the long run. And you preserve your option to get out if it turns down. There’s nothing unique about OXY versus many other companies. If WEB sees something special about them, he understands the industry far better than I do. There’s no evidence he even knew about them until BAC turned them down for a loan and sent them his way.
Thought I’d post a couple of interviews that Warren and Charlie did with Becky soon after the $10 Billion pref stock deal in 2019. They give some insight into what both were thinking at the time.
In the first interview, Charlie claims he had long followed Occidental as a company and more recently had been following the bidding war between Chevron and OXY for Anadarko. Thinks OXY/Anadarko deal was a good deal. The Permian Basin has a lot of oil and gas in it. Nobody asked us to buy Anadarko outright, but we might have.
Charlie is no stranger to oil and gas investments. I would think he has a firm grasp on the concepts. Perhaps better than most petroleum engineers. And let’s not forget Charlie’s greatest investment mistake was not buying 1500 more Belridge Oil shares when they were offered to him in 1977:
https://theconservativeincomeinvestor.com/charlie-mungers-be…
Perhaps Charlie views the OXY deal as having similar qualities to Belridge. An opportunity to redeem himself?
Another 2019 Becky interview below during the same time period with Warren describing events leading up to the deal:
Again, Warren implies he might have bought Anadarko outright but they weren’t approached and he wouldn’t have stepped into an ongoing deal process.
https://www.youtube.com/watch?v=FEoqs-6Y68A
Post Anadarko purchase, OXY now has the largest acreage position in the Permian Basin (more than Chevron and Exxon)by a wide margin. Certainly that makes OXY unique. Not all acreage is equal but more acreage generally means more potential reserve growth.
https://fingfx.thomsonreuters.com/gfx/editorcharts/CHEVRON-P…
I think (and Texirish disagrees with me)that OXY has a competitive advantage in CO2 EOR technology and infrastructure. I predict there will be a lot of oil recovered from the new shale wells through CO2 EOR - oil not currently accounted for on OXY’s reserve books. Carbon capture could play into this eventually by reducing their EOR operating costs. Naturally sourced CO2 is currently a significant part (40%?) of their current EOR operating cost. Warren and Charlie are likely aware of all of this.
If nothing else the above two interviews give further insight into Warren and Charlie’s thinking at the time.
Earlier this week Warren was buying more OXY common below $60 share. Is he done? I guess we’ll see!
BrecukHutHigh
I acknowledge that OXY is well positioned in the Permian. And that’s got a pretty long runway. And they’ve got a lot of royalty free acreage. So no argument there. But they’re not that much stronger than their major competitors - if at all. All will make good money at sustainable oil prices.
I see them having no advantage elsewhere compared to other major O&G companies. In fact, they have far less capabilities.
Warren and Charlie may see something I’m missing. If so, they’re right and I’m wrong. I’ve acknowledged that.
But my position remains. I don’t want to see Berkshire investing on a permanent basis in a commodity driven business with no major competitive advantages. Especially when they have the option of not doing so on a permanent basis.
That’s the crux of my argument. Keep dating, don’t get married.
"I see them having no advantage elsewhere compared to other major O&G companies. In fact, they have far less capabilities. "
Less capabilities? Elaborate?
Downstream refining. Chemicals - they’re really not in petrochemicals. Project management of multi-billion dollar projects. International experience. R&D capabilities. Size.
Regards Charlie and OXY, he has repeatedly said that it is stupid for us to deplete our reserves of a limited resource instead of getting them from outside the US. Maybe he is just the right long-term thinker to be buying OXY and not for the short term.
Regards Charlie and OXY, he has repeatedly said that it is stupid for us to deplete our reserves of a limited resource instead of getting them from outside the US. Maybe he is just the right long-term thinker to be buying OXY and not for the short term. (Emphasis mine)
My thoughts, exactly.
If Berkshire makes an outright purchase of the whole business, you can be sure it’s because Warren and Charlie are taking a 25-50 year view, not a 3-5 year view.
Having total rather than partial ownership gives a huge advantage to Berkshire that wouldn’t be an advantage in many other places - rational deployment of capital and deciding exactly which reserves to deplete and when to do so. They wouldn’t face the market or psychological pressure to keep making quarterly numbers.
From my limited understanding of commodities such as oil, exploration & developing of resources tends to be peak market prices are high, which then results in more supply which drives down prices, which then results in less exploration & development, which leads to high prices. Berkshire would have the capital and rational behaviour to invest counter to the market cycle and be able to sit on resources when prices are depressed.
“Downstream refining. Chemicals - they’re really not in petrochemicals. Project management of multi-billion dollar projects. International experience. R&D capabilities. Size.”
I agree that they are not top dog in those categories. Perhaps Exxon is, particularly with respect to project management.
But when Warren and Charlie look at OXY, do think they care about those areas?
With OXY, I think they see a reasonably well run E&P that has recently found capital discipline. A company with huge oil and gas resource in the Permian Basin. A company with subsurface expertise. They’ve been doing CO2 EOR for 40 years and will likely do it for another 100 years or more. The more CO2 they get through carbon capture, the more oil they will be able to pull out of the ground. Virtuous cycle.
Thanks for your thoughts. Will be interesting to see how it plays out.
With OXY, I think they see a reasonably well run E&P that has recently found capital discipline.
A company with huge oil and gas resource in the Permian Basin. A company with subsurface expertise.
I think maybe what they see more than anything else is a high US concentration.
They always seem to like the regulatory regime and property rights at home.
Jim
"I think maybe what they see more than anything else is a high US concentration.
They always seem to like the regulatory regime and property rights at home."
Not all property rights in the US are equal. Charlie knows from his Belridge experience there’s still a lot of oil in California. However, Charlie and Warren will likely not be investing in any E&P company with a major portion of the their reserves in California. OXY saw the regulatory nightmares in California coming and completely divested their assets in that state.
https://www.latimes.com/business/la-xpm-2014-feb-14-la-fi-oc…
States surrounding the enormous Appalachian shale gas deposits are cancelling/denying pipeline permits. I’d guess Charlie and Warren will not be investing in Appalachian gas any time soon.
The Permian is unique in terms of amount of oil in the ground
https://pubs.usgs.gov/fs/2018/3073/fs20183073.pdf
and a relatively friendly (as of now) regulatory climate.
BretHutHigh
If I were making a case for purchasing all of OXY, I would say it has a strong position in the Permian that dominates its performance and future. That’s a pretty good place to be. There are a lot of reserves there and XOM says it can earn 10% returns on Permian production at $35 oil. Assuming OXY is comparable, it should be reliable generator of cash - albeit it will be cyclic as other events determine the price it can get for its production. And it will have value to others if you wish to exit O&G some decades down the road with a different management in control of BRK. Family control will run out at some point.
So a good way to play the Permian - particularly if you expect to continue to generate excess cash requiring a home and face strong competition for purchasing other whole companies.
(But there’s also plenty of opportunities to purchase the stocks of other O&G companies. How do those prices compare with buying OXY? And more flexible.)
I don’t see other factors as being at the same level of importance. Where applicable, the existing conventional reservoirs in the Permian have been under CO2 flooding since before I retired in the mid-90’s. That won’t last a lot longer. And not all reservoirs respond well to CO2 flooding. It doesn’t recover a very high percentage of oil remaining after conventional production and waterflooding. Fine if you already own the properties, the wells are in place as a final stage and CO2 is available at the right cost. Otherwise …
I don’t believe tight oil is a candidate for CO2 based EOR - very low permeability. You can’t inject in one well and produce from another. It would have to be some kind of “huff and puff” process similar to certain steam flooding EOR. I doubt it could be profitable compared with just exploiting your reserves.
Munger makes a philosophical point about oil - it will be useful for other purposes when its use for generating energy diminishes. But practically who can invest many billions now and just let that money set for some decades not generating a return? Or have the USA totally dependent upon imports and at the mercy of other governments?
Back integration doesn’t make economic sense for BRK. Not while there’s plenty of other suppliers in a very competitive market.
I agree - it will be interesting to see how it all turns out.
Good exchange.
Warren and Charlie are taking a 25-50 year view, not a 3-5 year view.
Now that right there is funny.
For a 92 year old and a 98 year old, long term is next Friday. Neither of them is likely to see another 3-5 years.