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Trifecta

June 09, 2010 | About:

Trifecta a bet where the bettor wins by picking the first three winners in order...

Buffett, Tillerson and Hayward. What? Simple. BP is now trading with a market cap of around $94 billion or the equivalent of the value of its stand alone U.S. assets with what one would assume would be ZERO value to this UK company with assets worldwide. Yes, the spill is a disaster, a tragedy and the rhetoric is extreme for politicians and plaintiff attorneys has run off the edge of reality. These points are not lost on knowledgeable investors or businessmen.

Oil men are used to dealing with some of the most ruthless, unforgiving and dishonest people and nations in the world. Thus, I believe someone like Rex Tillerson, Exxon Mobil, is salivating at this opportunity to make a possible run at a company the even if it were hit with a $50 billion dollar bill for this mess would have most likely 10 or more years to come up with the dough (Time is not my estimate but that of the plaintiff attorney that just filed over 600 lawsuits on behalf of fishermen in LA. He said over 10-years.) and during that time this company will earn around $300 billion pre-tax. It is absurd for politicians to call into question this company's ability to pay for its earnings power is HUGE. Tillerson knows this as do the execs at Royal Dutch, Total, Chevron, etc.

Could an Exxon pull it off even while buying XTO? It wouldn't be easy. Kind of like M&M Mars trying to buy Wrigley's in the middle of the credit crisis. Enter stage right, Warren Buffett and Berkshire Hathaway with its problem of having to continually re-invest around $10 billion of pre-tax cash flow, and its Goldman Sachs ability to raise capital.

We know Tillerson is astute, and needs reserve replacement and these are cheap reserves. He has Exxon overweighted to Natural Gas and this could right the reserves with crude oil. Buffett interested in oil? ABSOLUTELY. The Burlington Northern deal and BYD investments were huge bets on it. Buffett felt oil at $140 area was justified in his ConocoPhilips buys however his timing was bad according to his shareholder letter. Charlie Munger puts energy as our world's number one concern. Is Buffett comfortable with the liability lawsuits, bancruptcy and other issues? Well his investments in John Mansville (Asbestos litigation and risks), USG, Fruit of the Loom, the Lloyds of London deal, etc. shows he is and he has the talent to quantify these things in Ajit Jain. This company is cheap and Buffett loves cheap.

Exxon forms JV with Berkshire Hathaway and buys BP just like M&M Mars Wrigley deal. Could the market get comfortable with that type of deal? I think they would if Buffett was explaining it. Remember, Buffett has now shown a willingness to issue BRK stock and its debt know trades with a lower yield than U.S. Government Bonds. Would the politicians be squashed? Hard for the democrats to attack their most famous supporter. Would the British Government allow it? Unfortunately, I don't think so, but maybe it would allow the JV to have the US assets.

Any thoughts on this are appreciated?

Oh, how did I come it with the listing of winners? Simple, Buffett always on top (GS, GE, WWY, Dow Chemical etc. deals from 2007-2008), Tillerson and Haywards' over a barrell.



Rating: 2.0/5 (1 vote)

Comments

Sivaram
Sivaram - 4 years ago
Warren Buffett has burned up a lot of political capital due to his dealings in Moody's, Goldman Sachs, GE, and others. I doubt he wants the controversy that will come from BP, let alone testify in front of Congress/Senate defending BP like he has with Moody's.

In any case, why would BP sell out? It would only do so* if it faces a liquidity crisis and can't finance the damages. If that were true, would other companies want to get involved and risk their cash flows?

The way I see it, BP will only be bought out if it is broken up. That will only happen if the lawsuit damages are way too large to be handled with internal cash flow and by issuing debt. Let's say oil prices collapse to around $40--I'm bearish on commodities--then we are probably looking at BP earning close to $8 billion which is probably $15 billion operating income. On top of that, BP can probably issue another $10 billion to $30 billion in debt--not in one day but over 2 or 3 years. Damages and all costs probably have to exceed $30 billion for BP to seek a suitor or break itself up.

(* There is always the possibility of management doing something stupid to benefit the short-term and hurt hte long-run. An example would be if management wanted to preserve the dividend at all costs and hence ends up selling the company for fraction of what they are worth.)

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