Buffett Investment Research
How good is the investment value in Buffett's Western Oil?
BUFFETT'S INVESTMENT IN WESTERN OIL COMPANIES BEGAN A FIERCE MERGER BATTLE IN 2019. When Western Oil CEO Vikki Hollow faces a competing offer from Chevron for $330 million, she stubbornly travels to Omaha to seek the support of “stock god” Buffett. BUFFETT INSIGHTS OPPORTUNITY GENEROUSLY RAISED $100 BILLION TO HELP WESTERN OIL ACQUIRE ANADACO FOR $380 BILLION. On the back of this strategic move, Barr has not only achieved high returns — a $100 billion preferred stock with a fixed dividend of 8%, and warrants to purchase 8 million shares of ordinary shares, which has also opened the door for Buffett's investment in Western Oil.
Futu Research focuses on the development of monetary opportunities, so this paper will explore the investment value of future Western crude oil in two ways, namely:
The logic of Buffett investing in Western oil;
Western Oil's current financial situation, valuation and investment opportunities;
1. The logic of Buffett investing in Western oil
Western Oil, which is mentioned in the full text of Buffett's letter to shareholders, is also very classic, and we separately disassemble the logic of Buffett investing in Western oil:
1. Although we like our ownership and options very much, the Hampshire company does not want to acquire or manage Western Oil Company. We particularly value the vast amount of oil and gas assets Western Oil has in the United States and its leadership in carbon capture, although the economic feasibility of this technology is proven. Both of these activities are very much in our national interest. Not long ago, the United States was heavily dependent on foreign oil, and carbon capture technology did not have many supporters.
Logic 1: Sufficient oil and gas reserve+advanced carbon capture technology;
2. In fact, in 1975, the oil production of the United States was 800 million barrels of oil equivalent per day (“BOEPD”), which is far from meeting the needs of the country. America's energy situation once provided favorable conditions for U.S. mobilization in World War II, but today, America's energy situation has deteriorated, becoming heavily dependent on potentially unstable foreign suppliers. Oil production is forecast to decline further, accompanied by an increase in oil usage in the future.
LOGIC 2: OIL'S LONG-TERM SUPPLY TENSION;
3. For a long time, this pessimistic sentiment seems to be correct, and by 2007, production fell to 500 million barrels/day. At the same time, the US government established the Strategic Petroleum Reserve (“SPR”) in 1975 to alleviate the problem of the erosion of American self-sufficiency, although this problem could not be completely eliminated.
Then, Hallelujah! The shale economy became viable in 2011, and America's dependence on energy ended. Now that oil production in the United States has exceeded 1300 million barrels per day, and OPEC is no longer the upper hand. Western Oil Company in the United States has annual oil production close to its entire inventory of SPR every year. If domestic oil production in the United States has remained at the level of 500 million barrels per day and is heavily dependent on non-US oil sources, then US resources will be extremely tight today. From this perspective, if foreign oil supplies are not available, then the SPR will be emptied in a few months.
Logic 3: Breakthrough in shale oil technology;
4. Under the leadership of Vicki Hollub (President and CEO of Western Oil), Western Oil benefits the United States and its shareholders. No one knows how oil prices will change in the next month, year or decade. But Vicki does know that the technology of separating oil and rock is an extraordinary ability that is valuable to both her shareholders and the country.
Logic 4: Vicki has strong professional skills;
WE SUMMARIZE BUFFETT'S APPROACH ABOVE, THE LOGIC OF BUFFETT INVESTING IN WESTERN OIL IS CENTERED ON:
Company Level: Adequate Oil & Gas Reserves+Advanced Carbon Capture Technology+Reliable Management
Industry: Oil's long-term supply-side strain+technical breakthroughs;
Macro: The United States will rely more on domestic energy production for security;
So overall, Buffett's investment in Western Oil is looking at the long-term potential of Western oil, and we can analyze Western oil from the current financial situation.
Second, the current financial situation and valuation of Western Oil
We continue with Buffett's thinking of thinking about this investment as buying the value of this business, which currently has a total market value of $531.83 billion, so let's first look at how the assets are in the accounts:
Asset Aspects
Variable parts:
Western Oil's current cash on hand is approximately US$14.26 million;
Receivables are approximately $31.95 million, but Western Oil receivables have been securitized (packaged and sold) to generate cash repayments of $9 billion by 2023;
Inventory is about $22.22 million, and there is no rush to sell;
Other current assets of US$17.32 million;
Overall, the range of variable assets stands at $83.75 billion.
Assets that are hard to turn into:
Oil and gas reserves of about $1092.14 billion, which is the most valuable asset in Western oil;
Chemical reserves of $82.70 billion;
Investments and prepayments of approximately $32.24 million;
So Buffett buys Western oil, and the most valuable resource reserves are worth $1092.14+82.7=1174.84 billion
Based on the information disclosed in the Annual Report, Western Oil's assets in the United States are as follows:
1、Permian Basin
Spanning western Texas and southeastern New Mexico, the region is one of the largest and most active oil basins in the United States, accounting for more than 45% of total U.S. oil production in 2023;
2、The Rockies and Other Domestic
(1) Owns more than 30 million acres of net land rights in the Powder River Basin, primarily in Converse County and Campbell County, Wyoming. The oil field contains the Turner, Neoblara, Moray, and Parkman layers, which harbor liquids and natural gas.
(2) Western Petroleum owns approximately 460 million acres of net land in other regions of the country, including land and mineral resources outside Western Petroleum's core operating areas, including parts of Arkansas, Colorado, Louisiana, Texas, West Virginia and Wyoming Region;
(3) The total net area of the DJ Basin (including the North DJ Basin) is approximately 70 million acres, providing competitive economic benefits, lower profit and loss balancing costs and free cash flow through the addition of Western Oil Company's continuous area location and franchise fees;
3. Gulf of Mexico assets in offshore domestic assets
The fourth largest oil and gas producer, operating deepwater floating platforms in 10 strategic locations, is the largest of all deepwater operators, producing in 18 active oil fields and owning operating interests across 261 blocks with a net area of approximately 90 million acres.
Western Oil's assets outside the United States are:
1. Middle East/North Africa Assets
(1) Algeria
Development and production rights to 18 oil fields in blocks 404a and 208, which are located in the Berkine Basin in the Sahara Desert of Algeria and are governed by agreements between Western Oil Corporation, Sonatrach and other partners. Western companies bear 35% of development and production costs. The El Merk Central Processing Facility in Block 208 processes oil, LNG and natural gas production, while the Hassi Berkine South and Ourhoud Central Processing Facilities in Block 404a process oil produced. Under the new development agreement, production rights for Block 404a and Block 208 oil fields will become effective on May 3, 2023 and will last until 2048.
(2) Oman
Occidental is the operator of Block 9, Block 27, Block 53 (Mukhaizna Oil Field), Block 62 and Block 65 and has an additional interest in Blocks 30, 51 and 72 in the exploration phase. The mining rights and contract maturity years for each block are shown in the table below. Western Petroleum owns 600 million acres of land and has 10,000 potential oil well storage locations. In 2023, the production share of Western Oil Company is 66 Mboe/d.
(3) Qatar
In partnership with the Dolphin Energy Project, the project consists of two independent economic interests. Western Petroleum has a 24.5% interest in the upstream business to develop and produce liquefied natural gas, natural gas and condensing oil from the North Qatar oil fields by mid-2032. Western Petroleum also has a 24.5% interest in DEL, which operates one pipeline and is further discussed in the midstream and marketing segments under the Table 10-K pipeline. In 2023, Dolphin, a western oil company, has a net production of 39 Mboe/d.
(4) UAE
Partnering with the Abu Dhabi National Oil Company, it owns a 40% stake in Shah Hosn Gas, which expires in 2041. In 2023, the net production of Western oil company Al Hosn Gas is 267 MMcf/d of natural gas and 38 Mbbl/d of NGL and condensing oil.
Looking at the oil and gas production in 2023:
(1) Production structure in 2023 52% is petroleum, 23% is NGLs, 25% is natural gas;
(2) The production is about 122 million barrels per day, of which 22 million barrels of oil gas are in non-US regions and 100 million barrels of petroleum liquids are produced in the US (of which oil is 53.4 million barrels per day, NGL24.8 million barrels per day, natural gas 21.8 million barrels per day);
As a result, Western Oil currently has extensive and complex assets spread across multiple countries, but the United States as a whole is still dominated by the United States.
From a security perspective, Buffett's investment in Western oil is an undeserved safety asset from a national security perspective in the United States:
After breaking down the assets section and then delving into the liabilities section, we found a total debt of $436.59 billion, with similar amounts of payables and receivables, mainly:
Short-term loan and lease liabilities of approximately US$16.48 million;
Long-term borrowings and leases of approximately $192.63 million;
Western Oil's overall free cash flow peaked at around $122.13 billion in 2022 and $60.38 billion in 2023, and the worst in 2020 was the oil price slump of around $14.20 billion.
If, according to Buffett's logic, if oil prices are stable at current levels and Western oil uses free cash flow as a bond, Western oil debt can be repaid in 3-4 years, but oil companies are more concerned with reserves.
It can be seen from the 2023 annual report that the annual production of about 4.3 billion barrels per year for almost three years is known (and there are large reserves unexplored) reserves that are sufficient for 9-10 years. If cash flows are generated at current crude oil prices, the cash flow generated in about 10 years can be used to store the discovered reserves. Western oil is buying, while there is a lot of unexplored reserves as a return on future investment.
At the 2023 Barr Shareholders Meeting, Buffett said: “We really like the resources, industry position and technical level of Western oil companies in the Biodiacal Basin, with a lot of quality oil wells, doing a lot of beneficial things, and is a completely different oil business.
Does the president of the Shire despise Western Oil and Chevron?
Manger: Owning both companies is equivalent to owning oil and gas resources in the Permian Basin.
According to a report released in November 2016 by the U.S. Geological Survey, a huge oil field has been discovered at Wolfcamp, in the Tigris Basin, with estimated reserves of 200 billion barrels, plus 16 trillion cubic feet of natural gas and 16 billion barrels of liquefied petroleum gas resources. Western Oil is the largest oil and gas major in the Tigris Basin.
Therefore, our overall judgment is that investing in Western oil at current oil prices is actually sufficient to recover the cost of the investment, and that the reserves of Western oil alone are sufficient to buy several Western oil companies.
So for the investment strategy of Western oil, due to its huge fluctuations in oil prices, we can give the following investment strategy assumptions:
1. If the oil price falls rapidly and predicts that the future oil price can recover, you can boldly invest in Western oil, on the contrary, if the forecast oil price cannot recover, there is a risk;
2. If the oil price can remain at the current position, investing in Western oil will also be able to fully recoup the investment capital;
3. If the oil price rises steadily, then holding Western oil will be a very stable and rich return;
We put together the first part of Buffett's judgment, and combined with Manger's judgment, that Buffett expects a third point to emerge, which is why he will hold Western Oil for a long time.
Our overall conclusion is that investing in Western oil is likely to be able to continue to make money in the absence of long-term declines in oil prices.
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