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The Berkshire Beat: October 27, 2023
All of the latest Berkshire Hathaway news and my must-reads of the week!
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The latest news and notes out of Omaha…
Let’s start with a surprise: Berkshire Hathaway purchased 3.92 million more shares of Occidental Petroleum between October 23-25 at prices ranging from $62.32 to $63.30 per share. That’s good for a total outlay of $246.4 million and boosts Berkshire’s stake in the oiler up to 25.8%.
Oxy’s share price fell sharply on Monday — likely in response to Chevron’s big announcement (more on that below) — and Warren Buffett was happy to scoop up more shares amidst the fall. Even at prices above $60.
Buffett paid more than $60 for Oxy shares in both July and August of last year, but has mostly stayed below that line. This week’s purchases represent a new high-water mark in terms of price paid.
Last week, Berkshire’s wholly-owned subsidiary GEICO announced that it would be laying off about 6% of its workforce. “To better position ourselves for long-term profitability and growth, and after a thorough evaluation across all lines of business, we are reducing our workforce by roughly 2,000 associates,” CEO Todd Combs wrote in a company-wide letter. “This will allow us to become more dynamic, agile, and streamline our processes while still serving our customers.”
GEICO has enjoyed a resurgence of sorts this year, recording an underwriting profit in the last two quarters after six straight in the red. But not enough of a turnaround to avoid cutbacks. Combs calls it a “very difficult period across the industry … [with] high inflation, longer repair times due to shortages of parts and labor, and rising medical costs all making claims more expensive”.
On Friday morning — and again on Monday — Berkshire’s Class B shares dropped to about $335. This is virtually the same average price per share that Warren Buffett paid when repurchasing 2.13 million B shares back in June. It might be time to fire up the Berkshire buyback machine once again.
The oil-and-gas arms race continues to heat up. On Monday, Chevron announced that it will acquire Hess Corporation in an all-stock deal valued at $53 billion. Including assumed debt, the price tag rises to $60 billion. Chevron’s interest seems to center on Hess’s offshore oil reserves in Guyana’s much-hyped Stabroek Block. Once the deal closes in the first half of 2024, the O&G giant projects that production and free cash flow will exceed prior guidance.
But here’s the rub: It comes at the cost of (significant) shareholder dilution. Chevron will issue about 317 million shares of common stock to complete the transaction. If my back-of-the-napkin math is correct, this will drop Berkshire’s ownership percentage of CVX 0.00%↑ from 6.45% to 5.5%.
Assuming, of course, that Berkshire hasn’t bought or sold any more shares of Chevron since June 30. Which is probably a bad assumption since Buffett has chopped and changed this position in twelve straight quarters.
Remember: Chevron already issued 41 million shares of common stock in August when it acquired PDC Energy. What’s another 317 million?
Perhaps in response to these concerns over dilution, Chevron pre-announced an 8% dividend hike for January 2024 and assured shareholders that it intends to repurchase shares at a rate of close to $20 billion per year (as long as oil prices remain high) once Hess joins the family.
In other “old energy” news, Occidental Petroleum CEO Vicki Hollub dropped an interesting comment at the recent Energy Intelligence Forum: “It was the Anadarko assets that carried us through [the oil crash in 2020]. With Oxy as a standalone, it would have been tougher for us.”
Adding Anadarko in 2019 — which was only possible via financing from Berkshire — allowed Oxy to refocus on the domestic U.S. market. This reduced the company’s risk profile and opened the door to more speculative projects like Direct Air Capture (DAC). “Our low-carbon ventures business needed a lot more stability and certainty [from] our oil and gas upstream.”
On Tuesday, Coca-Cola reported its Q3 2023 earnings and beat expectations on both the top and bottom lines. Not only that, but Coke also raised its full-year forecast and, once again, demonstrated strong pricing power. A timely boost for the soft drink maker after weeks of handwringing over the long-term effects of Ozempic and other weight-loss drugs on the soda industry.
Last night, Reuters reported that the Haslam family filed a lawsuit against Berkshire over the accounting methods used to value its remaining 20% stake in Pilot Travel Centers. According to the suit, the current arrangement will “unfairly harm Pilot and benefit Berkshire”.
On January 1, 2024, the Haslam family has the right to sell this 20% stake in Pilot to Berkshire — leading to this legal wrangling over its valuation.
Earlier this month, Buffett told James Haslam II, the founder of Pilot: “I said that Berkshire will comply with the terms of the contract. That's exactly what will happen.”
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Luck Is What Happens When Preparation Meets Opportunity
While getting this month’s “bonus” for paid supporters — an annotated transcript of Ted Weschler’s interview with the NFM podcast — ready to go, I was struck by how life-changing, defining moments often appear out of the blue and put all of the work and preparation that we’ve done in relative anonymity to the test.
(This certainly is true of Todd Combs, too, as he ably demonstrated his intellectual capacity and thorough understanding of businesses when (1) meeting Charlie Munger for the first time, (2) impressing the Blue Ridge Capital crew with his deep knowledge of the insurance industry, and (3) convincing Stephen Friedman to escape Fannie Mae’s sinking ship.)
In Weschler’s case, one of his earliest defining moments came while working on mergers and acquisitions at W.R. Grace & Co.
One day, the phone rang and Weschler was summoned up to provide a briefing on a particularly important merger to Peter Grace, the company’s larger-than-life CEO. Such a task was way above his pay grade — he was a relatively low-ranking employee not long out of college — but all of his bosses were out of the building and Grace was not a man that you kept waiting.
Weschler screwed up his courage and rode the elevator up to the palatial boardroom.
Once we’re all seated, this door opens and His Holiness (Peter Grace) comes through. He always smoked a pipe and he looks down at me and says, “Who are you?”
“I’m Ted Weschler. I’m here to brief you on National Medical Care.”
You could see him getting a little bit agitated. He had never met me and he didn’t know anything about this. He said, “Where did you go to school?”
I said, “I went to the University of Pennsylvania — Wharton undergrad.”
He went, “You don’t have an MBA?” and he said it in a really biting way.
I’m like, This has not started out well. (Laughs)
His pipe starts to shake a little bit and he really was getting quite worked up. He just starts going off about, “This is the biggest acquisition we’ve ever done! My grandfather founded this company! You’re sending this kid up to brief me on this thing?!?”
“It was just horrible,” Weschler laughed. “Absolutely horrible.”
But, after the vice chairman stepped in and convinced Grace to let Weschler speak, his many hours of preparation and research won the day.
[Peter Grace] starts asking me questions [about the acquisition]. I’ve been doing 100-hour weeks on this deal and I knew the deal well. It ended up being like an hour-and-a-half meeting. It was painful to start, but once it got rolling I felt like I did okay.
Weschler did more than okay.
He so thoroughly impressed Grace that — the very next morning — he was hired on as one of the CEO’s traveling assistants. And, from there, he was on his way.
Was Weschler “lucky” to get this opportunity? Sure. (Though he probably didn’t feel very lucky when he got grilled by Peter Grace in those first few moments.)
But it wasn’t luck that made the difference. Weschler had put in the time and done the work — meaning that, when his chance came, he was more than ready to shine.
The full, annotated transcript of Ted Weschler’s interview with NFM will be out on Monday to all paid supporters. Free subscribers will have access to the first 2,000-ish words (which is longer than the typical Kingswell article).
I’ve tried to do my best to ensure that no one feels short-changed.
Other awesome things that I read this week…
“One of the enduring misconceptions about Mr. Buffett is that he completely ignores the macroeconomy and geopolitics. This might be true in certain cases, but clearly Berkshire’s investments in Occidental and Chevron are statements on the continuing importance of oil in the global economy. This is inherently related to macroeconomic and geopolitical factors, including the wars currently raging in Ukraine and Israel.”
Who You Calling Dumb Money? Everyday Investors Do Just Fine (Hannah Miao || Wall Street Journal)
“One advantage small investors have over professionals: They don’t have to worry about reporting performance to clients. That helps some individuals feel comfortable riding out market downturns … Everyday investors are known to buy the dip, piling into markets during weak periods. Many jumped into stocks in March 2020 when the market plunged at the onset of the Covid-19 pandemic, and rode the high as shares rebounded.”
“Over the last decade, Apple’s total return has compounded at ~27% per year (+967%). Over the same period, the company had repurchased an average of $16 billion in common stock each quarter, amounting to a 39% reduction in the outstanding share count … American Express is another example, another long-term holding of Buffett. Over the last decade, the card company has retired more than 32% of its outstanding share count, averaging just under $1 billion in buybacks each quarter.”
Paramount Might Have Missed Deal Window (Alex Sherman || CNBC)
“Paramount Global isn’t actively working with an investment bank on a sale, according to people familiar with the matter. The company is content to wait for a shift in market conditions or regulatory officials before getting more aggressive on a transformational deal.”
“You must take the short-term pain in order to get the long-term gain. Investing is all about delayed gratification. What helped me was to not look at the stock prices of the companies I owned every single day. Instead, focus on the fundamentals and always think on the long term. The only way you can survive a bear market is by being truly passionate about investing and stocks.”
Ben Graham and the Mother Who Toughened His Shell (Beyond Ben Graham)
“On my visit to Omaha, Warren Buffett reminded me that Ben Graham always had a shell around him … Ben Graham managed to safeguard his own generous nature within that protective husk, his innate kindness, his friendliness, his determination to accomplish something big and prove his worth.”
“If you browse a corporate presentation and you see all the great things about the industry, the idea, the theme, the future, but very little about the economics of the business, it’s usually a no-brainer to stay away. It reminds me of gold company presentations… Many of the crappy gold mining stocks would give you a PowerPoint presentation that tells you why gold will go up over time in 50 pages, but then have like one map and a balance sheet at the very end of the presentation. It convinces you that gold might go up, but tells you nothing about the company. That’s the idea. It makes you want to buy something gold-related — and they hope you will buy the stock. They sold you gold, but made you buy their stock.”