Short position

  • Business
  • Saturday, 16 Jan 2016

Warren Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., speaks during an event with Hillary Clinton, former Secretary of State and 2016 Democratic presidential candidate, not pictured, at Sokol Auditorium in Omaha, Nebraska, U.S., on Wednesday, Dec. 16, 2015. Buffet said at the rally that he was supporting Clintons bid for president because they share a commitment to help the less affluent. Photographer: Daniel Acker/Bloomberg Local Caption Warren Buffett

Buffett’s oil bet

FOR those reading business news headlines nowadays, there’s not a day gone by without reports on global oil prices.

Recent headlines point to the “12-year lows” that prices have sunk to, the parity levels between the US crude benchmark, West Texas Intermediate (WTI) and the global benchmark, Brent, as well as the rise in inventories.

The losers from weak oil prices are the oil and gas explorers and the companies that service the oil and gas infrastructure such as rigs. The winners are not only consumers but also oil refiners, whose margins are better.

So it comes as no surprise when value-investing guru Warren Buffett, who controls Berkshire Hathaway, acquired more shares in Houston, Texas-based oil refiner Phillips 66. Berkshire, which own businesses from banking and finance to railroads, bought a further 5.1 million shares in Phillips 66 earlier in the month, taking its stake to 12.3%.

Berkshire has been raising its stake in Phillips 66 since early last year, according to reports, after trading a substantial portion of its stake in the company to buy a business involved in making additives that help crude oil flow through pipelines. It crossed the 10% threshold last August.

What’s intriguing about the acquisition is that while oil refiners are making better margins with the weak oil prices, there is very little downside left to the prices, so the upside to margins is also limited. Since June 2014, WTI has fallen by nearly 45% and while prices could hit US$25 a barrel in the coming weeks, it won’t weaken further even as supply looks to outstrip demand for some time to come.

Interestingly, Berkshire sold off the last of its stake in Exxon Mobil in the last quarter of 2014 as oil prices fell. Analysts believe that Berkshire still sees value in oil investments and that smaller refiners may be better prepared to benefit from a recovery in crude oil prices compared to the oil majors.

Therefore, it’s a very typical move by Buffett, taking the long view. Investors who wonder about the stake acquisition will have to likewise look at it from a long-term perspective and prepare for more volatility in crude prices if they want to follow in his footsteps.

Seacera’s news enthusiasm

PROPERTY and construction outfit Seacera Group Bhd’s share price had shot up over 20% in the week leading to its announcement that its 60%-owned subsidiary, SPAZ Sdn Bhd, had been pre-qualified for the construction works related to the proposed Damansara-Shah Alam Elevated Expressway (Dash) and proposed Sungai Besi-Ulu Kelang Elevated Expressway (Suke).

Going by the “sell on news” mantra, investors who bought ahead presumably sold the stock this week following the announcement. Nevertheless, it is interesting to note the disclosures by the company in releasing new developments.

Generally companies do not make an announcement during the pre-qualification stage. This is because being pre-qualified doesn’t necessarily mean actually getting the job.

Furthermore, in this particular case, there have been reports that no approval by the Selangor government has been given for Dash to commence.

Seacera was among the handful of pre-qualified firms which bid for the construction of the 118-storey Menara Warisan, which is supposed to be the country’s tallest building when it is completed in 2019.

In the end, the joint venture of South Korea’s Samsung C&T and UEM Group Bhd got that job.

Meanwhile, there has been no news of Seacera’s proposal for the country’s first electrified security fence project measuring more than 500 km along the Malaysian-Thai border.

In June 2014, Seacera, surprised the market when the low profile bumiputra company announced that it had, together with another little-known firm, Intelligent Fence (M) Sdn Bhd, submitted a proposal for such a mega job.

Ewein’s 10-year land deal

THE latest property foray by Penang-based Ewein Holdings Bhd is really a long-term asset banking strategy by the company and depends on the much-talked about Penang undersea tunnel project.

In an announcement to the exchange yesterday, Ewein’s 60% subsidiary has proposed to acquire 50 acres of freehold land in Bandar Tanjung Pinang for RM1,300 per sq ft.

On the face of it, it would appear that the vendor in the deal, which is Consortium Zenth BUCG Sdn Bhd would be walking away with a hefty profit as the going price now is about a third of the price being bandied about.

But careful scrutiny reveals that the agreement is to be completed over a 10-year period. So effectively, Ewein is securing the land that could come to realisation up to 10 years from now.

Ewein plans to build a wellness city on the land that would comprise, among others, apartments, resort, retirement and health care residential site and a host of other infrastructure related to the wellness city concept.

But before it can embark on the project, Consortium Zenith has to deliver the land, which technically is now under water and is to be reclaimed by Eastern & Oriental Bhd (E&O).

E&O, as the master developer of Sri Tanjong Pinang, is to surrender some of the reclaimed land to the state.

The Penang government in turn is planning to use the land as payment for the building of a proposed undersea tunnel linking the island and Butterworth. The ambitious project estimated at RM6.5bil will include a traffic dispersal system in Tanjong Tokong.

Consortium Zenith won the mandate to undertake the undersea tunnel and traffic dispersal system. In return it would get about 50 acres of land that is now the subject of its deal with Ewein.

So it really is a long-term project and the deal is subject to many other mega infrastructure jobs taking place.

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