Monthly Archives: August 2015

Berkshire Reveals Major Stake in Phillips 66

(BRK.A), (BRK.B)

Berkshire Hathaway has revealed that it now owns more than ten-percent of refiner Phillips 66 (PSX).

In early 2014, Berkshire swapped a large portion of its previous Phillips 66 position for the Houston-based company’s chemical business unit, which was added to Berkshire’s specialty chemical maker Lubrizol.

“We were able to do that on a tax-advantage basis. We didn’t trade them because we didn’t like the stock,” Warren Buffett said on CNBC’s Squawk Alley.

“I had always intended on coming back in, assuming that the price was right.”

A Surprise Revealed

In its SEC Form 13F filing on July 31, 2015, Berkshire stated that “confidential information has been omitted from the public Form 13F report and filed separately with the U.S. Securities and Exchange Commission,” which implied that the company was amassing shares in a company that it would reveal at a later date.

Berkshire, in its SEC Form 3 filing on August 25, stated it had accumulated 54,800,415 shares of Phillips 66 common stock. The position is worth aproximately $4.5 billion, and including shares owned prior to July 31, Berkshire owns 58 million shares.

51,873,456 of the total reported securities are owned by National Indemnity Company, a subsidiary of Berkshire Hathaway, and no price for those shares was reported.

However, 6,102,000 of the total reported securities are owned by the following pension plans of Berkshire’s subsidiaries: FlightSafety International Inc. Retirement Income Plan (350,000), Fruit of the Loom Pension Trust (921,300), GEICO Corporation Pension Plan Trust (2,499,700), Johns Manville Corporation Master Pension Trust (2,187,000), and General Re Corp. Employee Retirement Trust (144,000). The purchase price of those shares ranged from $71.56-$77.26.

About Phillips 66

Phillips 66 was spun-off of ConocoPhillips in May 2012, and its refining and petrochemical business has been mostly immune to the downward pressure on oil prices, as the demand for refined products, including gasoline, diesel and aviation fuel remains strong. Phillips 66 also transports crude oil, refined products, natural gas and natural gas liquids (NGL). It gathers, processes and markets natural gas and NGL to power businesses, heat homes and provide feedstock to the petrochemical industry.

The company’s 52-week share price high was $87.98, and it currently pays an annual dividend of 56 cents, yielding 2.9%.

Buffett, Combs or Weschler

Berkshire does not normally announce which transactions are the work of Warren Buffett, and which transactions are the work of his two portfolio managers Todd Combs and Ted Weschler. While Warren Buffett has acquired most of Berkshire’s portfolio, Todd Combs and Ted Weschler each manage a portfolio that is roughly $9 billion in assets. The two investment managers are widely assumed to be the future managers of the entire portfolio.

The total portfolio slipped to a market value of $107.182 Billion at the end of second quarter from $110.776 billion at the end of the 1st quarter 2015.

(This article contains updated information from when it was first published.)

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Denver the Latest City for BYD’s Pure-Electric Buses

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There was a time when cities were very pleased with adding hybrid buses to reduce emissions from smoky diesel buses. These days, the mantra is zero-emissions, as cities work to meet tougher pollution and climate change goals. These goals benefit BYD Co. Ltd, the Chinese company that is a world-leader in rechargeable batteries, and maker of pure-electric and traditional fuel vehicles.

The company, which is partially-owned by Berkshire Hathaway, continues to make inroads in the U.S. market with its all-electric buses.

In Denver, Colorado, the Regional Transportation District (RTD) has approved the purchase of 36 of BYD’s 45-foot pure-electric buses for its 16th Street Mall shuttle, which is the RTD’s busiest bus route.

The buses replace a more than decade-old fleet of hybrid buses, which are aging out of service. The new buses will eliminate emissions on the heavily travelled route.

The RTS is spending $27.1 million to purchase the buses, which will have a 12-year lifespan.

BYD has been begun assembling its buses for the U.S. market in a plant it opened in Long Beach, California. The company is already making pure-electric buses for Long Beach’s transportation system.

In 2008, Berkshire Hathaway bet on BYD’s potential and purchased 225 million shares, and today owns roughly 10% of the company.

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkshire’s PacifiCorp Gets Tens of Millions in Benefits from Energy Imbalance Market

(BRK.A), (BRK.B)

$30 million in annual savings would make most investors wobbly, but in Berkshire Hathaway’s case it is making them more balanced.

In 2014, when Berkshire Hathaway Energy’s PacifiCorp agreed to become the first participant in a new Energy Imbalance Market (EIM), the market was touted as a way to balance electricity in-flows and out-flows on a regional basis that would bring millions of dollars in benefits to participating utilities.

The EIM began financially-binding operation on November 1, 2014, by optimizing resources across the ISO and PacifiCorp’s balancing authority areas (BAAs), which includes California, Oregon, Washington, Utah, Idaho and Wyoming.

The EIM improves the integration of renewable resources and increases reliability by sharing information between balancing authorities on electricity delivery conditions across the entire EIM region.

Tens of Millions in Benefits a Year

The predicted benefits have proven to be true, and the California Independent Service Operator (CAISO) has been able to quantify the benefits from the April, May, and June 2015 to be $10.18 million.

In its July report, CAISO said that it, “continues to prove EIM’s ability to select the lowest cost resource across the PacifiCorp and ISO balancing authority areas to serve demand and measures benefits within the following categories, which were described in an earlier study conducted by Energy + Environmental Economics (E3)1 for PacifiCorp and the ISO.”

The report noted:

• More efficient dispatch, both inter- and intra-regional, in the Fifteen-Minute Market (FMM) and Real-Time Dispatch (RTD) by automating dispatch every fifteen minutes and every five minutes within PacifiCorp’s two BAAs and between the PacifiCorp and California ISO BAAs.

• Reduced renewable energy curtailment by allowing BAAs to export or reduce imports of renewable generation when it would otherwise need to be economically curtailed.

• Reduced flexibility reserves needed in PacifiCorp BAAs, which saves cost by aggregating the load, wind, and solar variability and forecast errors of the combined EIM footprint. This report introduces the flexibility reserve benefits for PacifiCorp but defers measurement of reduced flexibility reserve benefits for the ISO to future reports due to the need to develop additional measurement techniques.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Berkadia Expands Its Sales Force in the Midwest

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Berkshire Hathaway’s joint venture Berkadia Commercial Mortgage is expanding its multifamily investment sales team with 12 new hires across the Midwest.

The new additions, all joining from Marcus & Millichap, include nine multifamily investment sales advisors and three supporting team members, who will be located in Berkadia’s Chicago, St. Louis and Kansas City, Missouri offices.

In the last 12 months, the team has closed 31 transactions totaling more than $300 million.

Eight of the new hires will join the Chicago office, expanding the existing office by nearly one-third of its original size, and bringing the total number of mortgage banking and investment sales professionals to 36.

The investment sales team joins the already established Berkadia mortgage banking team, making it a fully integrated regional office.

Senior Directors David Gaines and Alex Blagojevich, along with Director Michael Sullivan, are the leaders of the coordinated team.

In total, the group has brokered more than $1 billion in the sale of over 17,000 units across the Midwest.

Across Berkadia’s 70 offices, multifamily investment sales and mortgage banking production exceeded $17 billion in 2014.

Sales and finance volumes are on pace to surpass this number for the current calendar year.

About Berkadia

Berkadia is a third-party commercial mortgage servicer, as well as an approved lender for Fannie Mae, Freddie Mac, and HUD/FHA. The company was among the top Freddie Mac and Fannie Mae multifamily lenders for 2013.

Berkadia was founded in 2009 as a 50/50 joint venture between Berkshire Hathaway and Leucadia National Corporation.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

No More Elephants For Buffett’s Famed “Elephant Gun,” For Now

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Warren Buffett likes to refer to his hunting for big companies, such as his acquisition of BNSF Railway, and the recently announced Precision Castparts Corp., as hunting for elephants with his “elephant gun.”

While each year Berkshire does on average $3 billion of bolt-on acquisitions for its various companies, it takes something really elephant-sized to move the needle on a conglomerate with a market value of a third of a trillion dollars.

Those kinds of deals, be they BNSF, Kraft Heinz, or Precision Castparts, also mean that the Buffett’s elephant gun will be quiet while he refills the cash coffers. Berkshire is spending down its $66 billion in cash by $20 billion, and Buffet likes to maintain at least $20 billion in cash as a reserve in the case of economic downturns.

Buffett Reloads the Cash

“This takes us out of the market for an elephant but we will probably be buying a few small things in the next 6 months,” Buffett recently remarked, explaining the deal for Precision Castparts. “We are in negotiations on a couple but in terms of a deal of similar size it pretty much takes us out. What we will probably do on this one, we will probably borrow about $10 billion and use about $23 billion of our own cash on that order. We’ll be left with over $40 billion probably in cash when we get all through. But I like to have a lot of cash at all times, so this means we have to reload over the next 12 months or so, but it doesn’t preclude doing smaller deals, but we will be doing a few probably.”

That’s The Way The Cookie Crumbles

So, despite the recent excitement around activist investor Bill Ackman of Pershing Square having taken a $5.5 billion stake in snack food company Mondelez, perhaps with the goal of seeing it sold to a buyer like Berkshire, don’t look for it to merge into either Berkshire or Kraft Heinz any time soon.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

BNSF’s Crude Oil Shipments Stay Strong, Defy Predictions

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Despite dire predictions that falling oil prices would dry up oil drilling in the Bakken Formation, and drastically cut the number of 100-car oil trains hauled by BNSF, petroleum carloads are holding fairly steady.

Carloads of petroleum as of August 15, 2015 are 321,855 as compared to 339,981 for the same period of 2014. The change is only down 5.33% from last year.

The change in carloads has had minimal impact on BNSF, as carloads of coal and grain are both up, giving the railroad a total increase in carloads of 1.14% over this time last year.

Why the High Number of Carloads?

Carloads of crude oil have held strong because predictions that new wells in the Bakken Formation would be uneconomical below $60 a barrel have been way off base.

The marginal cost to produce a barrel of oil has dropped in recent years, and while the breakeven price varies county by county, with it being as high $77 in McLean County, North Dakota, the North Dakota Department of Mineral Resources notes that it is as low as $30 in McKenzie County, North Dakota, and only $29 a barrel in Dunn County, North Dakota.

You Can Cut Even That in Half

The volume also stays high because the cost to pump oil for existing wells is even cheaper. The Bakken Magazine notes that, “The price at which production from existing wells would be shut-in occurs when the oil prices drop to $15 per barrel.”

The per barrel price of oil from the Bakken Formation sells at a discount as compared to oil from some other areas due to additional shipping costs.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Australian Insurer IAG Grants Non-Dilution Rights to Berkshire

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Berkshire Hathaway’s new minority stake in the Australian insurer Insurance Australia Group Limited (IAG) includes non-dilution rights that have been approved by the Australian Securities Exchange (ASX).

Under a waiver granted by ASX, IAG has agreed to give non-dilution rights to Berkshire’s wholly-owned National Indemnity Company (NICO), granting the company the right to buy shares at the same price as other investors if there is an issuance of securities.

In June of 2015, Berkshire through NICO paid A$500 million (US$387.8 million) for 3.7% of IAG.

Under the terms of the agreement, IAG agreed to give NICO 20% of IAG’s premiums in exchange for paying 20% of its claims over the next 10 years, a move that right off the bat brings NICO $1.78 billion of premium annually.

The IAG waiver was one of twelve waivers granted by ASX in the past year. Other companies receiving waivers included Aurelia Metals, Clancy Exploration, and Ensogo Limited.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Is Berkshire Getting Precision Castparts Too Cheap?

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Did Berkshire Hathaway pay too much when they agreed to pay $37.2 billion for aerospace parts manufacturer Precision Castparts?

That seems to be the Wall Street consensus based on the way the stock price has sagged a bit. Analysts slammed the deal, proclaiming that unlike the 2009 takeover of BNSF Railway this is a case of buying at the top of the market, not the bottom.

Buffett Agrees

While Warren Buffett doesn’t believe he is paying too much, after all, he’s buying a company Berkshire plans to still own in a hundred years, he has acknowledged, “This is a very high multiple for us to pay.”

Not So Fast

While almost everyone thinks the price is too high, Georg H. Krijgh of the G.H. Krijgh Guardian Fund, a private partnership based in the Netherlands, thinks it is way too low, and that Buffett has pulled a fast one again.

In a letter to Precision Castparts’ Board of Directors he states:

“Precision Castparts is the largest investment of our fund. We believe that the true value of the company is far in excess of the USD 235 per share offer by Berkshire Hathaway. In our view:
1. An independent Precision Castparts is worth at least USD 40 billion.
2. Berkshire Hathaway is not paying an appropriate premium.
3. Accepting the USD 235 per share offer is not in line with the fiduciary duty of the Board of Directors.
4. We will vote against the proposed sale.

We believe that the PCC Board of Directors is leaving significant value on the table.

We expect earnings of USD 2 billion

First, Mr. Buffett is telling the media that the multiple is high. This might be true based on 2015 earnings but it is incorrect when using future expected earnings and free cash flow. Current earnings are temporarily under pressure due to lower volumes in energy markets. PCC’s aerospace business is much less cyclical than widely believed and the ramp-up of several programs such as the Boeing 737 MAX, A320neo and the H-class turbines is likely to significantly increase earnings per share in the next few years even when energy markets remain weak. Mr. Donegan confirmed this in several recent earnings calls. We believe that free cash flow will grow to USD 2 billion annually.

Multiple of at least 20 times

Second, PCC deserves a high multiple because it has a tremendously strong market position, which is clearly visible by the continuously high return on equity. It is the low-cost and often sole-source provider of mission critical components in a secular growth market, a leader in metallurgical technology, owner of intellectual property and strategic assets such as TIMET and has a strong balance sheet. Especially in these times of low interest rates, PCC deserves a multiple above 20 times earnings. PCC is worth at least USD 40 billion.”

More From Krigh

“Berkshire Hathaway is offering a normal multiple on depressed earnings. Mr. Buffett, whom we greatly respect, and his team have a reputation of finding companies that are not aware of their true fair value. A case in point is Berkshire Hathaway’s takeover of Burlington Northern in 2009. He bought the railroad just before the economy and earnings rebounded. In 2009, shareholders may have been distracted by the credit crisis. Currently, there is no reason to sell for a low price in a hurry. The quoted 21% premium is based on a short-term dip in the share price. For many days during the past year the share price was trading above USD 220, a 6% discount to the offer price.”

Is There Really A Premium?

Krigh cites Precision Castparts’ own stock repurchases to question whether Berkshire is even paying a premium for the stock at all in light of the stock’s 52-week high of $249.12 being above Berkshire’s offer of $235 per share.

“During the past two years, the Board of Directors approved and executed share repurchases at prices around Berkshire Hathaway’s offer price. A significant part of the buybacks seems to have occurred at an average price above USD 230. It is puzzling why you are willing to buy Precision Castparts shares at this price and at the same time sell full control of the business at the same price. In addition, in 2014 and 2015, Berkshire Hathaway bought additional shares of PCC for a price between USD 200 and USD 240. You are aware that they are intelligent investors and only buy when the intrinsic value is significantly higher than the price. This confirms the fact that the USD 235 per share offer is too low.”

So, is Berkshire paying too much or too little? Only time will tell, but when you plan to own something a hundred years or two, it will probably look like quite a bargain at some point.

For Berkshire shareholders alive today, here’s hoping that the bargain is now.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

BYD Beats Nissan and Tesla in June/July Car Sales

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It’s summer and BYD Company Limited’s car sales are heating up, even as some major car companies have wilted.

While everyone watches Tesla and Nissan to get the pulse of EV car sales, Chinese car-maker BYD has quietly topped their world-wide sales figures for June and July.

BYD, which Berkshire Hathaway holds a minority stake in of nearly 10%, reported selling 5,037 EVs and PHEVs in June 2015.

Nissan’s U.S. sales have been particularly soft, reporting selling only 1,174 of its Nissan LEAF EVs in July, a number that is roughly a third of the 3,019 it sold in July 2014.

Tesla, which reports its sales on a quarterly basis, reported that 11,507 of its Model S were delivered worldwide in April-June. The figure was up 52% for the same period in 2014.

Why the Lack of Attention?

BYD, which is the world-leader in rechargeable batteries, has yet to enter the U.S. car market with either its all-electric or hybrid vehicles. In the U.S., the company has focused on the battery-powered zero emission bus market, winning contracts in San Diego and Long Beach, California. The company has built a factory to build the buses in Long Beach.

However, BYD is inching toward car sales. In the spring of 2015 it began a pilot program with Uber in Chicago that used BYDs E6 sedan. The car is a cross between a sedan and SUV, and currently gets roughly 186 miles (300 km) of driving range per charge. The 2016 E6 will reportedly get a range increase to 250 miles (400 km).

For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.

Reinsurance Losses Swamps Berkshire in Australia

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The old saying is “when it rains, it pours,” and boy did it rain in Australia this April and May.

It’s no secret that Charlie Munger has cooled on the reinsurance business, and recent losses in Australia only add to a situation where profits are hard to come by due to increased competition.

In the 2nd quarter of 2015, Berkshire reported $155 million in losses from storm damage on Australia’s east coast.

Through its Berkshire Hathaway Reinsurance Group, Berkshire provides reinsurance to Suncorp and Insurance Australia Group.

A Double-Whammy Brings Billion-Dollar Losses

A severe late-April storm that hit Sidney cut off roads, washed away houses and brought 13,000 calls for help. A second severe storm in the beginning of May hit south east Queensland. The storm gave Brisbane its wettest day in 175 years.

The combined storms brought $1.55 billion in claims from more than 20,000 policy holders.

Munger Cool on Reinsurance

Storms or no storms, Berkshire is not generating the profits it used to from reinsurance.

“The reinsurance business not as good as it once was and is unlikely to get better,” Charlie Munger said at the 2015 Berkshire Hathaway annual meeting. “Money has come in, not because they want to be in reinsurance, but because it’s an uncorrelated asset class. We’re in it for the long haul.”

Uncorrelated (also called non-correlated) asset classes are assets that move in the opposite direction of a particular asset class, thus helping investors reduce risk in exchange for lower upside performance.

Munger’s words were echoed by Ajit Jain, who is the head of Berkshire Hathaway Reinsurance. “What was a very lucrative business is no longer a very lucrative business going forward” Jain was quoted in The Wall Street Journal.

© 2015 David Mazor

Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.