Halls of Shrewd'm / US Policy❤
No. of Recommendations: 26
More on the OXY "story"...
Mohnish Pabrai's Talk and Q&A session with students at the University of Texas on February 28, 2023
(video posted yesterday)
(57:11 min)
Question regarding Berkshire's foray into OXY
Q: (paraphrasing)"Could we get your thoughts on what you understand about Charlie Munger and Warren Bufffet's foray into Occidental? Because for the longest time they had avoided materials and very cyclical commodities. And then now they enter into Occidental and keep increasing their stakes. What do you think of that (OXY) as an investment?"
Pabrai:" Yeah, so I think both of them have been investors in oil and gas for a very long time. Munger made an investment into what eventually became one of his biggest mistakes, because he didn't buy enough, Belridge Oil in 1977. So, you know that's like 46 years back. Charlie will tell me things. You know I have a good friendship with Charlie. I usually see him four or five times a year for dinner and I used to play a lot of bridge with him. You know some times I be at his place and he'd tell me...and you know he's living in you know Hancock Park in L.A...he's says that "you know we are sitting on top of an oil field." Then he explained to me that whole area actually was an oil field. But because so many humans moved in and the real estate prices became more expensive, it became more attractive to build homes and sell the real estate that way, than it did to drill for oil. L.A. basically developed without extracting the oil so to speak. So it still sits there.
One time I was talking to him and he (Charlie) mentioned that he would like to have an investment in Exxon and be able to get a commitment from the management that they would do no more Capex, and they would simply run all the fields with the cashflow going to shareholders. And he had calculated it would be a tremendous investment. And of course oil companies don't think that way. But OXY thinks that way. So, I think the OXY investment...if you study Occidental what you'll find is they really don't have exploration going on.
So, if we look at the whole fracking business, you know the Permian Basin and all of that, basically when you drill a well you've got a 90% plus shot of what's going to come out. The probabilities (of success) are really high. And it's not like what used to be conventional oil and gas. So here you've got very definitive metrics going on. And so OXY basically has no...almost no...speculative drilling going on. And so, in effect, it looks like a CD. They're clipping the coupons. What OXY is doing is they got a huge gusher of cashflows coming out. And that huge gusher of cashflows is only going into buybacks and dividends. So it's all being pumped out to shareholders. And he loves that.
And then they've made an investment in Chevron. I think the reason they made the investment in Chevron is also because Chevron also has a very large position in the Permian Basin. And if OXY had been large enough he wouldn't have gone to Chevron. Just like bought all the U.S. airlines. You know a while back he bought all...because he couldn't make one bet because the size of the capital is so large.....So, I think the Chevron bet is heavily a bet based on this non-exploration risk (high probability of success). You know the oil business lately, and of course UT Austin knows this really well, with the $8 billion every year that's coming into the UT endowment, bigger than Harvard's.......
So the bet with Chevron and OXY is a coupon clipping bet. And so I think Buffett looked at what U.S. Treasuries were paying him and he doesn't want downside. So he looked at OXY as U.S. treasuries on steroids. And I think that's why he went with that bet." (OXY question starts at 57:11 min)
https://www.youtube.com/watch?v=UcJB1m3cXKw
No. of Recommendations: 16
That's some really interesting insights from Pabrai. And the "coupon clipping" strategy makes sense for the OXY investment. OXY does state they have some decades of reserves avlable in the Permian after the Anadarko acquisition. So it's not like they need new exploration to keep going for a long period.
The part about Chevron though doesn't really fit the strategy. While CVX is significant in the Permian, they have more outside the Permian plus a significant refining business and a JV venture in petrochemicals. So it would make more sense to be investing in other primarily Permian and shale oil companies. They are available and now have actually better dividend and buyback operations than OXY while OXY is concentrating on debt reduction.
This point also applies to buying all of OXY. Why pay a buyout premium for it when you can get comparable buys at market prices for very similar companies?
Some may argue about OXY's claims for future major business in CO2 recovery and reuse. I think this is so far in the future that it can be ignored for current investment decisions. And it is highly uncertain to happen. OXY claims to have "unique" opportunities in this field. I'm unable to identify any. All major producers in the Permian have CO2 based EOR capabilities similar to OXY. The direct air capture approach they're taking has huge obstacles to overcome. OXY has far smaller capabilities than the major oil companies in other CO2 capture and storage/uses. And they will also have to compete with the chemical industry. The only "unique" aspect I can see is their focus on DAC.
Their commercial scale DAC demo plant startup has now been delayed to sometime in 2025. And it is a scaleup by a factor of 1400 from the small pilot plant used to develop the technology. Yet they started claiming 35 commercial plants by 2035, raised that to 70, and have now talked 105. That's going way out on a limb. This initial plant is supposed to recover CO2 at a cost somewhere in the $380-420 a ton from their presentations. They expect to reduce this to around $100-120 a ton by the "n"th plant - with n being undefined. That's pretty optimistic. Yet they're already talking as if this will happen.
Not a reason to invest in OXY today.
Let me be clear. I have no objections to BRK investing in OXY as a Permian play. I think it's a good investment opportunity, and there are other similar ones still available. I do have reservations about buying all of OXY if it is truly a depleting business. And, after a lot of digging, I see no reasons to put added value on OXY for CO2 capture.
No. of Recommendations: 5
While CVX is significant in the Permian, they have more outside the Permian plus a significant refining business and a JV venture in petrochemicals. So it would make more sense to be investing in other primarily Permian and shale oil companies. They are available and now have actually better dividend and buyback operations than OXY while OXY is concentrating on debt reduction.
This point also applies to buying all of OXY. Why pay a buyout premium for it when you can get comparable buys at market prices for very similar companies?
I think the insight Pabrai brings is not so much the certitude of getting oil in the Permian, but rather the degree of confidence one can have, as a minority investor, that management will juice earnings by NOT investing in discovery, but just exploit existing resources in a run-off mode, even if that run-off is over many decades. This is Munger's dream for Exxon, this non-investment orientation, and it may be something that Buffett knows that OXY and CVX's are buying into. Taking a controlling stake would be the way to cement this orientation in, and paying a premium on half the outstanding OXY shares may be a worthwhile investment to get that certainty.
And in the meantime, having 2 horses in this race may provide the advantage of improving Berkshire's negotiating strength with OXY: stick to the program of sending all profits back to the shareholders, or I might go with the other horse that is running better that way.
Are you aware of other oil and gas companies in the Permian that have a non-investment orientation (or an orientation in favour of 'coupon-clipping', as Pabrai reports Munger to have said?)
dtb
No. of Recommendations: 0
Permisan is all in Texas....subject to a lot of political stresses....I think if BRK sold his TSM for political risk, I applaud him not investing everything in Texas
No. of Recommendations: 3
Are you aware of other oil and gas companies in the Permian that have a non-investment orientation (or an orientation in favour of 'coupon-clipping', as Pabrai reports Munger to have said?)
Both Oil companies owned by Biglari Holdings pursue a near-zero investment philosophy for exploration and development. These companies are called Southern Oil of Louisiana (wholly owned, not in the Permian - shallow water GoM) and Abraxas Petroleum (90% owned, all operations in the Permian). There is some talk of using JVs to bring in 3rd party capital to fund drilling but that model has not attracted outside capital so far. A 10% stub of Abraxas trades illiquidity but will be going dark, will probably be squeezed out by the parent company, and I would not expect common shareholders of Abraxas to be treated fairly in whatever ultimately happens. Not an investment rec.
No. of Recommendations: 1
All oil companies consider the 'produce it on out, cash in'option. I spent Christmas 1973 during the gas shortages with the president of one of the majors. Every time some congressman called him up to berate him, threaten nationalizing,regulation etc. he would wax dreamily about producing the existing reserves and calling it quits.
Running the numbers of 'no new investment, huge special dividends' usually pencils out to some impressive values.
No. of Recommendations: 0
Permian has two major basins. Midland - all TX. Delaware - TX and NM.
No. of Recommendations: 6
Running the numbers of 'no new investment, huge special dividends' usually pencils out to some impressive values.
Yes, I guess the numbers look so good, it makes sense to at least give lip service to the idea. The question is, will the company stick to the plan? Most do not.
Apart from the possibility that Occidental and Chevron and maybe others (like Southern Oil of Louisiana, Abraxas Petroleum, thanks nola for the comment) actually follow this game plan, it may be that the social and political pressure in favour of cutting back on exploration and also transportation, refining, etc.) being much stronger now, maybe more companies will cut back on exploration, even if they don't stop altogether. And the added bonus for all of them, if they do, is that oil prices may stay higher for longer.
It's not hard to imagine that when falling output (from non-investment) meets persistent demand (from people who will keep travelling in planes and buying big cars and consuming plastic, despite claiming to be very concerned about global warming), the price of oil could end up a lot higher than it is now. It wouldn't take many more years like last year for an investment in OXY to pan out. OXY is at 5 times last year's earnings for a reason: investors are not counting on good years like last year happening for long. But they might.
dtb
No. of Recommendations: 2
Chevron (NYSE:CVX) said Monday it started a road trip across the U.S. Gulf Coast to showcase what it says is an innovative new gasoline blend with more than 50% renewable content that eventually will offer emissions savings similar to electric vehicles.
The company said team members will drive Toyota's Tundra, RAV4 and Camry on the road trip with the objective of demonstrating the fuel, which it says is more than 40% less carbon intensive than traditional gasoline on a lifecycle basis.
"Multiple solutions are needed to help lower the carbon intensity of the transportation sector," Chevron executive Andy Walz said. "Renewable gasoline blends could empower virtually all drivers to have a role in a lower carbon transportation future" without having to buy a new car.
https://seekingalpha.com/news/3957145-chevron-show...
No. of Recommendations: 0
"Running the numbers of 'no new investment, huge special dividends' usually pencils out to some impressive values."
It seems to me that if OXY takes the 100 year view, then the better value is to buy more oil assets, preferably adjacent to their fields in the Permian basin, not to repurchase stock. Most of the value of an oil company, by far, lies in its proven reserves. Hollub believes that exploration is not a good use of cash because there is little new oil to be found.
Hopefully she also believes that today's price of OXY stock is attractive (at an enterprise value/proven reserves of $27/boe) since she's repurchasing stock. Maybe Hollub is unable to find anyone willing to sell her reserves at $27/boe. Either that, or she's taking the short view, not the long view. Please correct me if my reasoning is wrong.
No. of Recommendations: 4
Q: "Are you aware of other oil and gas companies in the Permian that have a non-investment orientation (or an orientation in favour of 'coupon-clipping', as Pabrai reports Munger to have said?)"
A:"Both Oil companies owned by Biglari Holdings pursue a near-zero investment philosophy for exploration and development. These companies are called Southern Oil of Louisiana (wholly owned, not in the Permian - shallow water GoM) and Abraxas Petroleum (90% owned, all operations in the Permian)."It's somewhat misleading to use the term "near-zero" investment when describing these companies. You refer to Abraxas Petroleum" as having a "near-zero investment philosophy."
Production declines on shale wells are steep. Abraxas will have to drill additional wells just to keep their Permain production flat. Those additional wells require significant capital expenditures.
From Abraxas' 2022 10-K:
"Exploration and Development Activity. At December 31, 2022, we operated properties comprising approximately 97% of the Boe's of our estimated net proved reserves, giving us substantial control over the timing and incurrence of operating and capital expenditures. We have identified numerous additional drilling locations on our existing leaseholds.
The rate of production from our oil and gas properties and our proved reserves will decline as our reserves are produced unless we acquire additional properties containing proved reserves, conduct successful development and exploration activities or, through engineering studies identify additional behind-pipe zones or secondary recovery reserves."https://seekingalpha.com/filing/7428629Doesn't sound like a "near-zero" investment policy to me.
Couldn't find any information on Southern Oil of Louisiana (are they even public?).
OXY state they have an inventory of nearly 7,000 onshore drilling locations identified that would "break even"* at >$60/bbl. In the next decade a significant portion of those locations will have to be drilled in order for OXY to maintain production at current levels. If we assume a cost of a completed 10,000 ft horizontal Permian well at +/-$6 million (use your own number), we are looking at tens of billions in well development Capex required over the next several years.
*BREAKEVEN DEFINED AS POSITIVE NPV 10, WELL COSTS USED IN ANALYSIS BASED ON 2022 BUDGET AND INCLUDE DRILLING, COMPLETION, HOOK-UP AND FIRST LIFT
(slide 31)
https://www.oxy.com/globalassets/documents/investo...
No. of Recommendations: 5
Doesn't sound like a "near-zero" investment policy to me.
They haven't drilled a well in two years, don't plan to drill or pay for drilling going forward. They sold their only drilling rig in February, sold their headquarters building, they have hardly any employees left, fired their CEO subsequent to year-end, and will let the production decline and collect the cash flows unless a third party comes in a pays to drill wells in exchange for an interest in those wells. Which is why I said what I said.
Abraxas and Southern Oil are both consolidated subsidiaries of Biglari Holdings. They are both run in the way Charlie described in Pabrai's talk. Abraxas was just taken over recently and is implementing the playbook described above.
No. of Recommendations: 6
Hopefully she also believes that today's price of OXY stock is attractive (at an enterprise value/proven reserves of $27/boe) since she's repurchasing stock. Maybe Hollub is unable to find anyone willing to sell her reserves at $27/boe. Either that, or she's taking the short view, not the long view.
I don't know what the answer to your question is, but I prefer the short view, or at least, the medium view, not the long view. Occidental has a $57b market cap, at today's price of $63/share. If Hollub can keep capex at minimal levels and deliver $13.3b in good years like last year, with $3.8b in capex, and maybe juice that a bit by eliminating all new drilling (not all capex, of course; you need some spending just to replace equipment), and cut even farther back on production in years when the oil price languishes, not worrying too much about declining barrels of production, that sounds like a strategy that might rapidly make this investment very profitable. And if a bunch of companies do the same, they will all enjoy higher prices. And even the global warming worriers will be happy, since higher prices will speed the transition to renewables, making them competitive earlier.
I would be happy to own shares in a modern-day equivalent of Philip Morris, raking in profits from a slowly dying, but very profitable business.
dtb
No. of Recommendations: 2
"raking in profits from a slowly dying, but very profitable business"
OK. Please note that I'm not accusing Hollub or harming Occidental, or of harming the world. Im just wondering if buying reserves, if that's possible, might increase Occidental's value more than repurchasing stock. Or if buying another oil company might be better than repurchasing stock. There are cheaper oil and gas companies out there than Occidental, at least on an enterprise value to proven reserves basis.
No. of Recommendations: 0
"They haven't drilled a well in two years, don't plan to drill or pay for drilling going forward. They sold their only drilling rig in February, sold their headquarters building, they have hardly any employees left, fired their CEO subsequent to year-end, and will let the production decline and collect the cash flows unless a third party comes in a pays to drill wells in exchange for an interest in those wells. Which is why I said what I said."
I stand corrected.
No. of Recommendations: 6
"It seems to me that if OXY takes the 100 year view, then the better value is to buy more oil assets, preferably adjacent to their fields in the Permian basin, not to repurchase stock. Most of the value of an oil company, by far, lies in its proven reserves. Hollub believes that exploration is not a good use of cash because there is little new oil to be found.
Hopefully she also believes that today's price of OXY stock is attractive (at an enterprise value/proven reserves of $27/boe) since she's repurchasing stock. Maybe Hollub is unable to find anyone willing to sell her reserves at $27/boe. Either that, or she's taking the short view, not the long view. Please correct me if my reasoning is wrong."
I think your reasoning is solid, but you just forgot to account for Manic Mr. Market.
Let other companies spend lots of money on the lottery that is oil exploration. Instead focus on the proven reserves you have. Then when Manic Mr. Market puts one of these exploration companies on sale for some crazy reason (Mr. Musk said that all new cars will be electric in 2030!!!!) then use capital to buy up those proven reserves.
No. of Recommendations: 7
I think the insight Pabrai brings is not so much the certitude of getting oil in the Permian, but rather the degree of confidence one can have, as a minority investor, that management will juice earnings by NOT investing in discovery, but just exploit existing resources in a run-off mode, even if that run-off is over many decades. This is Munger's dream for Exxon, this non-investment orientation, and it may be something that Buffett knows that OXY and CVX's are buying into. Taking a controlling stake would be the way to cement this orientation in, and paying a premium on half the outstanding OXY shares may be a worthwhile investment to get that certainty.
And in the meantime, having 2 horses in this race may provide the advantage of improving Berkshire's negotiating strength with OXY: stick to the program of sending all profits back to the shareholders, or I might go with the other horse that is running better that way.
Since I have never believed that Buffett would want to own 100% of OXY (too much political attention / exposure - much the same as a DaVita), I have been trying to discern just why he is hoovering it up and owning so much of a company he now cannot sell without cratering it.
Taken together with Pabrai's comments, I think the bolded part in your post above gets me to an answer. I'd rephrase it this way: 'stick to the program of I will back a sale to Chevron' (or Exxon, or perhaps some up and comer). We know how far Hollub went to get Anadarko (keep scale or otherwise Oxy was next). She wants to keep her job and, if she sticks to the program, it is a win for her, shareholders and Buffett.
No. of Recommendations: 2
Here's Bloomberg with more reasons to be optimistic about oilco's concentrating on returning cash to investors rather than ploughing it back into production:
What emerges from the M&A will be Shale 4.0. It will be dominated by larger but slower companies like Exxon and its archrival Chevron. The end of the oil production boom isn't the end of the industry. It will just change personality: becoming more pliant to the profit motives of Wall Street. Indeed, less output growth means better returns for the stockholders of the shale companies. As tobacco proved years ago, reducing capital expenditures ' thereby freeing more cash for shareholders ' can be very profitable.https://www.bloomberg.com/opinion/articles/2023-04...dtb
