Poor Bets in Oil & Derivatives, Rethinking the Buffett Game (BRK-A, BRK-B, COP, WFC, DOW)

Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B) may have had the wind behind its back from its annual shareholder meeting, but that wind now may be  breaking wind.  This was Warren Buffett’s quarterly loss since 2001.  On a net loss basis, Berkshire Hathaway lost roughly $1.5 billion.  While some charges and operations were lower, it was the big oil investment in ConocoPhillips (NYSE: COP) which Buffett went on and on about.  The huge gains seen in Wells Fargo & Co. (NYSE: WFC) and other financial stocks were hardly a footnote throughout the earnings.

The company’s operating earnings were down more than 10% to $1.705 billion, which is close to $1,100.00 per share.  That is technically above a consensus estimate of $1,087 from Thomson Reuters.  Be advised that “consensus estimates” on Berkshire are nearly immaterial because so few analysts cover it.  The reported top line of $22.8 billion was down almost 10% from last year’s Q1 period.

To show just how bad his play in oil was, Buffett’s own comments speak clearer than anyone’s: “…We sold 13.7 million shares of ConocoPhillips during the first quarter and additional shares were sold subsequent to the end of the quarter. Although we expect the market price of ConocoPhillips to increase over time to levels that exceed our original cost, we are likely to sell some additional shares prior to that time and generate additional capital losses that we can carry back to prior tax years when we generated net capital gains. In 2006, we paid about $690 million in federal tax on capital gains and that payment can only be fully recovered if capital losses of at least $1.98 billion are taken in 2009.” After looking through Buffett’s Full List of Stocks, he held some 79.896 million at the end of Q4.  We noted this was likely lower, and it seems that he is going to use the rest for tax purposes this year.  So that is Buffett’s greatest venture in the oil business… a source of tax offsets.

Technically, this was Buffett’s worst quarter since the huge insurance losses after the Sept. 11  terrorist attacks.  There is a silver lining in the report that has gotten very little coverage.  His huge investment of roughly 290.4 million shares in Wells Fargo & Co. (NYSE: WFC) is now worth more than $8.1 billion.  That is actually DOUBLE of what it was worth March 31.

The bright spots were the utilities and insurance companies, but other operations were so-so at best.  Buffett will tell you even he can’t escape a recession, but he invests with a forever time frame.  Well, forever in everything but oil at any rate.

Buffett had already acknowledged a huge mistake in ConocoPhillips, and his derivative losses are still criticized even if they may all work in his favor through time.  Those derivative losses are easy to criticize when the markets are in free fall and there is no way to issue a real stated value on them, but he is opportunistic there even if he paid out close to $675 million on credit risk derivatives in the quarter.  Berkshire has also paid out another $450 million on credit default derivatives since the end of the quarter, and has roughly $3.3 billion set aside in reserves for future derivative losses tied to the same.

Berkshire’s cash balance was $25.6 billion at quarter-end, although he did write a check for some $3 billion to assist Dow Chemical (NYSE: DOW) in its acquisition of Rohm & Haas.

Berkshire Hathaway closed at $95,295.00 on Friday, and its 52-week trading range is $70,050.00 to $147,000.00.  Shares were at $92,005.00 a week ago before the annual meeting, so the gain there has been roughly in-line with this week’s move in the market.  Outside of the financial side, there is likely nothing here that makes this stock better than he market as a whole, although it would be easy to have the critics harp on the net loss and a lack of performance for the conglomerate.

As always, you can see the Full List of Buffett Stock Holdings here.

JON C. OGG
May 9, 2009