Adobe beat revenue and profit expectations, and on the same day announced it would acquire a smaller but faster-growing rival in online design-collaboration tools. The stock market rewarded the company by pushing down its shares
ADBE,
-3.12%
to the lowest level in almost three years.
Investors punished the company not for its earnings report, released Thursday, but for their disdain of the Figma deal. Specifically, the deal’s price.
Read: Nervous investors are slamming tech deals. Just look at Adobe.
In a $20 billion half-cash, half-stock transaction, Figma became the highest-multiple cloud-scale SaaS deal ever done. An estimated $400 million in revenue for all of 2022 marks this deal at around 50 times this year’s revenue in what I believe to be the second-largest software as a service deal in history.
In this market, where growth is persona non grata, the market deemed this deal a bridge too far. However, in this case, the market may have gotten this wrong.
Figma is among the fastest-growing companies
If you aren’t familiar with Figma, it’s a red-hot, venture-backed (before Thursday) company that makes collaboration tools used for digital experiences. While Figma was founded in 2011, the first five years were spent trying to get to product. The company printed its first dollar in revenue in 2017 and will hit $400 million in annual recurring revenue (ARR) in 2022.
For those who aren’t familiar with SaaS economics, hitting $400 million in recurring revenue in just over 10 years is remarkable. However, doing so five years from the first dollar of revenue is even more impressive.
For reference, the average cloud-scale SaaS company books $10 million in revenue after about 4.5 years, according to Kimchi Hill. In the same study, assessing more than 72 SaaS companies that reached $100 million, only eight did so in less than five years from the first dollar — and that was precisely $100 million. Most take five to 10 years to hit $100 million, and well-known names like DocuSign
DOCU,
-6.14%,
Coupa
COUP,
-4.28%,
RingCentral
RNG,
-5.34%
and Five9
FIVN,
-4.22%
took 10 to 15 years.
Beyond its speedy growth, the company is also performing in a way that should have been lauded by at least the savviest of investors. Its 150% net customer retention rate, 90% gross margins, high organic growth and positive operating cash flow make it more of what investors want in a company today. Adobe already grows in the double digits, plays in attractive markets, compounds ARR and, at this point, has seen its multiple come way down off its highs.
It is also worth considering how Figma may benefit from Adobe’s strong market position, known product portfolio and defined channels, and go-to-market strategies to speed its growth in this space with a total addressable market of about $16.5 billion.
Rare companies are still rare
Perhaps it sounds as if I’m gushing over this deal. I want to be clear that I am not. At least not yet.
However, the hive mind of the market can be quite perplexing at times, and there is a data-driven story here that justifies Adobe’s decision to buy Figma at such a lofty price. Unfortunately, we won’t know with any certainty for five or even 10 years. Investors may not like that, but Adobe’s longevity depends on operating with the longer term in mind.
Tough economy or not, rare companies are still rare, and Figma is traversing market conditions and delivering growth in a large market, drawing Adobe in at an unprecedented price. Perhaps higher than it should have, or could have, paid.
However, based on its rapid revenue growth, strong net dollar retention, 100% growth rate in 2022, massive margins and apparent synergies across the Adobe portfolio, it may be Adobe that has the last laugh on this one.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising or consulting to Adobe, Five9 and dozens of other technology companies. Neither he nor his firm holds any equity positions in companies cited. Follow him on Twitter @danielnewmanUV.
have reached a deal to merge to form one of the largest publicly traded mineral and royalty companies in the U.S., worth about $4 billion, the companies announced Tuesday.
Sitio and Brigham, like the rest of the industry, both have had increasing profits in the past few months on the back of rising oil prices. Combining the two companies would allow the new entity to achieve economies of scale and become a leader in the minerals-rights industry, the companies said.
“The mineral and royalty space benefits from scale unlike any other business in the energy value chain,” Sitio Chief Executive Officer
Chris Conoscenti
said in an interview Monday.
After the deal was announced, shares of Sitio fell about 2% to $24.71 in morning trading. Brigham stock fell 3.54% to $28.36.
Mineral owners take home a cut of the oil and gas pumped on their land in the form of royalty payments, often 12.5% to 20% of the value of the fuel. They don’t control the pace of development, but they aren’t on the hook for drilling or overhead costs, either, and they reap the benefits of high commodity prices.
Both Brigham Minerals and Sitio have been making substantial acquisitions this year in the oil-rich Permian basin.
Photo:
Michael Nagle/Bloomberg News
Upon the deal’s closing,
Noam Lockshin,
a partner at private-equity firm Kimmeridge Energy Management, which currently owns 43.2% of Sitio’s shares outstanding, would become chairman of the new company, the companies said. Mr. Lockshin currently serves as chairman of Sitio. Mr. Conoscenti will serve as CEO of the combined company, which will be based in Denver and operate under the name Sitio.
The all-stock deal is expected to close in the first quarter of 2023, according to the companies. Under the terms of the deal, Sitio’s shareholders will own about 54% of the company, while Brigham’s will own the remaining 46%, the companies said.
Both Sitio and Brigham have been pursuing a consolidation strategy in the oil-rich Permian basin of West Texas and New Mexico, making substantial acquisitions this year.
Sitio was formed after the merger of Kimmeridge-owned Desert Peak Minerals Inc. and
Blackstone Inc.
-backed Falcon Minerals Corp. earlier this year.
Brigham has announced mineral and royalty interest deals in the region worth about $150 million so far this year. Sitio, meanwhile, purchased more than 40,000 net royalty acres in the Permian in the second and third quarters of the year, the company told investors last month, including a roughly $323 million acquisition in June.
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The newly formed company would have interests in more than 34% of all wells drilled in the Permian in the fourth quarter of 2021, the companies said.
Brigham CEO
Robert Roosa
said last month he is bullish on oil prices, citing supply-chain issues that limit production in the oil patch, issues related to Russia’s energy supplies, the need to refill the drawn-down Strategic Petroleum Reserve and what he described as the inability of the Organization of the Petroleum Exporting Countries to ramp up production.
“We’ve seen long-term structural advantages to being in energy,” he told investors.
European energy prices surged after Russia shut down natural-gas flows through a major pipeline, threatening to add to economic woes for businesses and households across the continent.
Natural-gas futures in northwest Europe, which reflect the cost of fuel in the wholesale market, jumped more than 30% in early trading Monday. They remain below the all-time high recorded in late August.
State-controlled Gazprom PJSC extended a halt to flows through Nord Stream late Friday. Moscow blamed the suspension on technical problems. European governments described it as an economic attack in retaliation for their support of Ukraine.
Over the weekend, governments in Sweden and Finland offered billions of dollars of guarantees to utilities to prevent a meltdown in energy trading. Officials fear the loss of imports through Nord Stream could lead to a further leap in power prices and saddle utilities with cash payments to energy trading exchanges that they may struggle to meet. A wave of failed payments could undermine financial stability, officials said.
“This has had the ingredients for a kind of a Lehman Brothers of energy industry,” Finland’s Economic Affairs Minister
Mika Lintilä
said Sunday.
Swedish and Finnish government officials worked through the weekend on programs designed to make sure electricity producers can meet exchange payments known as margin calls. Stockholm is home to
Nasdaq
Clearing AB, a subsidiary of
Nasdaq Inc.
that processes most derivative trades in the Nordic power market, which includes Finland and the Baltic countries.
Under the Swedish plan, the government would provide guarantees to eligible companies, which could then use the guarantees to borrow from banks and pay the exchange clearinghouse. The Swedish government would have license to extend up to 250 billion kroner, or $23 billion, in guarantees, said a finance-ministry official.
The Finnish government plans to offer 10 billion euros, or $10 billion, in guarantees.
Nasdaq Clearing spokesman David Augustsson said the measures would help the power market act in an orderly manner Monday. “This is an extreme time of uncertainty and the addition of government liquidity guarantees will add an extra layer of stability,” he said.
Last week, European Energy Exchange AG, the main European venue for power trading outside the Nordics, said Germany and other European Union members should help companies fund margin payments. A spokesperson didn’t respond to requests for comment on Sunday.
Russia’s state-controlled Gazprom PJSC extended a halt to flows through the Nord Stream pipeline late Friday.
Photo:
HANNIBAL HANSCHKE/REUTERS
Armed with the guarantees, utilities and other energy companies would find banks more willing to lend money to cover margin payments, the Swedish official said. The Swedish parliament will vote on the program Monday and it would take effect the same day if approved. One concern is that the clearinghouse itself might default, the official said.
“This threatens our financial stability. If we don’t act soon it could lead to serious disruptions in the Nordics and Baltics,“ Swedish Prime Minister Magdalena Andersson said Saturday at a news conference outlining the plan. “In the worst-case scenario we could fall into a financial crisis,” Ms. Andersson added.
When utilities agree to deliver gas or power, they lock in prices by selling futures contracts. Exchanges charge one payment, known as initial margin, when trades are placed to collect collateral. They then call for or return money each day depending on whether the position gains or loses value.
As prices rise, utilities’ short positions shed value and the companies pay the exchange. They recoup the money when they deliver gas or power, but the difference in timing has led to massive outflows of cash that some firms have struggled to fund. At times a vicious cycle has emerged in which extreme price moves boost margin calls, prompting companies to bail out of trades and sparking more volatility.
“No one’s got the money to pay to trade,” said Justin Colley, an analyst at Argus Media. “Putting up these margin payments every day is just causing problems for everyone—not just the small companies, but also the big companies, the national utilities.”
The guarantees could add to the mounting cost for governments of aiding households and businesses through a historic rise in energy prices largely caused by Moscow’s move to cut gas exports. On Sunday, Germany unveiled its third energy relief package this year, worth €65 billion, to shield consumers.
European energy ministers are due to hold an emergency meeting Friday to discuss options for dealing with skyrocketing electricity prices, such as a possible price cap for non-gas sources of power generation.
They will also consider energy companies’ cash concerns. The Czech Republic, which holds the EU’s rotating presidency, is expected to put forward several options for ministers to consider, including the temporary suspension of power derivatives markets and a European credit line for energy market participants, an EU diplomat said.
European gas and power prices have been wildly volatile. They shot to records in late August before slumping last week after the European Union said it would change the structure of the power market to bring down prices for consumers and businesses. Nordic and Baltic prices have been especially turbulent, in part because a drought curbed hydropower generation in Norway.
Tom Marzec-Manser, gas analyst at ICIS, said he expected gas and electricity prices to rise again Monday in response to Gazprom’s shut-off. “Meeting demand, whatever that might turn out to be, is going to be that much harder,” he said.
To a certain extent, energy markets were already girding for Russia to completely cut off gas supplies. Gazprom had reduced Nord Stream flows to 20% capacity in the weeks before the shutdown.
Some factors could act to bring prices down after an initial leap, traders and analysts said—including the action taken by Nordic governments. Weather forecasts suggest there might be greater power generation from wind farms, reducing demand for gas.
Uniper,
one of the two biggest buyers of Russian gas in Europe until recently, said last week it had fully drawn down a €9 billion credit line from German state lender KfW. The company said it had asked to borrow an extra €4 billion to make margin payments and buy gas to make up for lost deliveries from Gazprom.
Russia indefinitely suspended natural gas flows to Europe via a key pipeline hours after the Group of Seven agreed to an oil price cap for Russian crude—two opposing blows exchanged between Moscow and the West in an economic war running parallel to the military conflict in Ukraine.
Kremlin-controlled energy company Gazprom PJSC said late Friday it would suspend supplies of gas to Germany via the Nord Stream natural-gas pipeline until further notice, raising the pressure on Europe as governments race to avoid energy shortages this winter.
Gazprom said it had found a technical fault during maintenance of the pipeline, which connects Russia with Germany under the Baltic Sea. The company said the pipeline will remain shut down until the issue is fixed, without giving any timeline.
The pipeline was due to resume work early Saturday after three-day maintenance. Before the maintenance, the pipeline was operating at 20% of its capacity.
Russia first began throttling supplies via Nord Stream in June, saying that needed maintenance was being prevented by Western sanctions imposed following Russia’s invasion of Ukraine. The notion was dismissed by European officials as an excuse for Russian President
Vladimir Putin’s
regime to use its gas exports to punish Europe for its support of Ukraine.
Western leaders are preparing for the possibility that Russian natural gas flows through the key Nord Stream pipeline may never return to full levels. WSJ’s Shelby Holliday explains what an energy crisis could look like in Europe, and how it might ripple through the world. Illustration: David Fang
A complete shutdown of Nord Stream will compel European governments to accelerate their push to become independent of Russian gas ahead of the winter months and could force them to ration energy—a move that would hurt industrial companies and tip the continent’s already fragile economy into a recession.
“By further reducing gas deliveries, Russia is tightening the screws on the EU,” said Janis Kluge, an expert on Russia at the German Institute for International and Security Affairs. “Europe will now have to take its efforts up a notch to conserve more gas.”
At the same time, the move deprives Moscow of its most potent economic leverage on the continent and could remove any remaining misgivings in European capitals about raising sanctions on Moscow for fear of retribution.
“Until it is repaired, gas transport via Nord Stream is completely stopped,” Gazprom said Friday.
Moscow and the West have been engaged in an economic war since Russia invaded Ukraine in February. Western democracies have inflicted economic and financial sanctions on Russia, and Moscow has tried to choke unfriendly countries’ access to its natural gas, which Europe uses for heating and electricity production.
ArcelorMittal SA,
one of the world’s largest steelmakers, was the latest industrial giant to say it is reducing European production capacity amid the energy crisis. The company said Friday it will close two of its plants in Germany amid soaring electricity costs.
Steelmaking is particularly energy intensive, alongside other industries like fertilizer and chemical production and glass making.
G-7 countries said on Friday they would impose a cap on the price of Russian oil. The mechanism would force buyers seeking to insure their shipment via insurers located in a G-7 or European Union country to observe the price limit on their purchases. The cap, whose level will be set at a future meeting, originated in a U.S. initiative and has been under discussion for months.
Russia has said countries imposing a cap wouldn’t receive any Russian oil. Sales of oil make up a far bigger share of Russian state revenues than sales of natural gas.
Inspectors from the United Nations’ nuclear agency visited the Russian-occupied Zaporizhzhia nuclear-power plant, despite shelling near the facility for which Ukraine and Russia exchanged blame. On Friday, Ukraine accused Russia of hindering access to the plant. Photo: Yuri Kochetkov/Shutterstock
Hours before Gazprom’s Nord Stream announcement, German Finance Minister
Christian Lindner
praised the G-7 decision, saying “Russia is generating big profits from the export of commodities such as oil, which is something we must push back on vigorously.”
The cap, he added, would help combat inflation in the EU.
Russia would have enough capacity via other gas pipelines to Europe to compensate for the Nord Stream shortfall. However, flows via these other routes declined following the start of the war in Ukraine.
Ukraine halted one gas-transit route in May, blaming interference by Russian forces. Deliveries through another, called Yamal, which traditionally transported gas from Russia to Europe, have stopped this year due to sanctions imposed by Russia on the Polish part-owner.
Germany’s economy minister,
Robert Habeck,
said this week that the country can’t count on Nord Stream during the winter.
In reaction to the Nord Stream closure, a spokeswoman for the ministry said on Friday that Germany was far better prepared than a few months ago.
“We have already seen Russia’s unreliability in the past few weeks, and accordingly we have unwaveringly and consistently pursued our measures to strengthen our independence from Russian energy imports,” the spokeswoman said.
Klaus Müller, head of Germany’s energy regulator, said the country would need to boost gas imports from other suppliers, continue to fill up gas stores and cut gas consumption.
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European officials had expected that the Kremlin would use gas flows to keep markets and governments on edge and erode support for Ukraine among Western voters.
Gazprom’s shutting down of Nord Stream “under fallacious pretenses is another confirmation of its unreliability as a supplier,” European Commission spokesman Eric Mamer wrote on Twitter.
A senior manager of a German gas company formerly controlled by Gazprom said Friday that he expects local importers of gas channeled via Nord Stream to stop paying for their contractual obligations with Gazprom.
Natural-gas prices have broken records in recent weeks amid the energy crunch, though they have also dropped sharply in the past days, with some analysts crediting the speed at which Europeans have been filling up their gas storage facilities through the summer.
Goldman Sachs analysts said that the Nord Stream outage would cause prices to surge again. The Gazprom decision “will reignite market uncertainty regarding the region’s ability to manage storage through winter, driving a significant rally,” the bank said in a note to clients.
Gazprom began throttling gas flows in June, citing technical problems with the turbines. The company insists that a key turbine couldn’t be sent to Russia after it was maintained in Canada because of international sanctions on Moscow. But Germany, where the turbine was located, said that there are no obstacles, and that Moscow was in fact blocking the turbine’s return to Russia.
On Friday, Gazprom said that it found an oil leak in a turbine at the compressor station of the pipeline. Gazprom said that similar issues had been found with other turbines this summer that have led to the reduction of the gas flows.
Gazprom said it had notified German company
Siemens Energy AG
, which maintains the turbines, of the new leak. Gazprom said that the necessary repairs could only be done in a specialized repair facility. Previously, some turbines for the pipeline had been repaired by Siemens Energy in Canada.
Siemens Energy said that Gazprom’s announcement wasn’t a technical reason for stopping operation. “Such leakages do not usually affect the operation of a turbine and can be sealed on site. It is a routine procedure during maintenance work,” the company said. It said it wasn’t currently contracted for maintenance work but is ready to assist.
Europe has been preparing for a possible Russian gas cutoff, with EU gas- storage facilities filling up faster than expected this summer, to over 80%.
Still, if Nord Stream remains shut, Europe’s gas stores would end the winter at 26% of their capacity, which would complicate Europe’s situation next winter, Massimo Di Odoardo, vice president for gas and liquefied natural gas research at energy consulting firm Wood Mackenzie, wrote this week.
Germany, which received more than half of its gas from Russia before the war in Ukraine, has been racing to diversify its supply of gas and to install floating liquefied natural gas terminals to ship in gas from the U.S. and elsewhere. In recent months, Germany’s gas imports from Norway, Belgium and the Netherlands have far outweighed the reduced Russian flows.
The country is close to hitting its 85% gas storage target, initially set for Oct. 1. German officials, however, have warned that reaching the next milestone of 95% by Nov. 1 would be challenging unless companies and households cut consumption.
The 760-mile-long Nord Stream pipeline first opened in 2011. Russia and a consortium of European energy companies built a second pipeline, Nord Stream 2, running alongside the original one, that would have doubled capacity. But the German government froze the project in February over the war in Ukraine.
—Bojan Pancevski contributed to this article.
Write to Georgi Kantchev at georgi.kantchev@wsj.com and Andrew Duehren at andrew.duehren@wsj.com
even further isn’t expected to serve as a prelude to a full takeover of the resurgent energy company by the widely watched billionaire, at least for now.
In a regulatory filing Friday, the Federal Energy Regulatory Commission said that Mr. Buffett’s
Berkshire Hathaway Inc.
BRK.B -2.30%
had received permission to buy up to 50% of the driller’s shares. The news stoked speculation that Berkshire could be gearing up to acquire Occidental.
Analysts have said Occidental’s oil business would complement Berkshire’s existing energy holdings, which include utilities, natural gas and renewables. Mr. Buffett has a warm relationship with Chief Executive
Vicki Hollub
and has publicly praised her efforts to turn the company around after its acquisition of Anadarko Petroleum Corp. and her plans to pay down debt and increase dividend payouts.
But Mr. Buffett hasn’t informed Occidental of any plans to acquire a controlling stake in the company, according to people close to the matter. Given Mr. Buffett’s well-known aversion to hostile deal making, it would be out of character for him to make a bid without sounding out the company’s executives and directors first.
Owning such a big stake—Berkshire is Occidental’s largest shareholder—gives him major influence over the company already, and acquiring control could cost him a hefty premium to the current share price. The stock closed Friday at $71.29, up nearly 10% on the news, giving the company a market capitalization of about $66 billion.
Why would Berkshire seek out permission to buy more of Occidental, then?
For one, it was close to running up against FERC-imposed investing limits.
Filings show Berkshire currently has a 20% stake in Occidental. It also has warrants to purchase another 83.9 million common shares and 100,000 shares of preferred stock that pay a hefty dividend—both of which it acquired after helping Occidental finance its 2019 acquisition of Anadarko.
If Berkshire were to exercise the warrants, its stake would rise to roughly 27%. That would have exceeded the 25% limit FERC allowed for before Friday’s ruling.
“This is not a company that’s going to raise regulators’ hackles,” said Cathy Seifert, an analyst for CFRA Research.
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It should also give Berkshire breathing room in case share buybacks or other company moves decrease the amount of shares outstanding, thus increasing its percentage stake.
There are other reasons to doubt a Berkshire takeover of Occidental is imminent.
One of them is price, said David Kass, a professor of finance at the University of Maryland’s Robert H. Smith School of Business.
So far, Berkshire has bought virtually all of its Occidental shares at a price in the range of $50 to $60, Mr. Kass said. The highest price Berkshire paid was $60.37 in July, according to filings.
Mr. Buffett is a well-known bargain-hunter, so it is difficult to imagine Berkshire rushing to buy more Occidental shares at the current price, Mr. Kass said. The shares are up 146% for the year, boosted by a rally in the price of oil, compared with an 11% decline for the S&P 500.
People familiar with deliberations at Occidental said the company’s leadership believes Mr. Buffett might consider making an offer if oil prices fall, bringing down Occidental’s stock price. If Mr. Buffett made an offer the company viewed as fair, a majority of the Occidental’s board would likely approve presenting it to shareholders, one of the people said.
Mr. Buffett didn’t respond to a request for comment. An Occidental spokesman declined to comment.
Mr. Buffett is currently represented as a passive shareholder in Occidental, based on the so-called 13G filing he has on record with the U.S. Securities and Exchange Commission. If he were to change his intentions and hold meaningful discussions with the company about a full-on takeover, he would likely need to change his filing to a 13D, which is required by large shareholders who intend to get actively involved in the running of a company.
Taxes could also play a role in Mr. Buffett’s bid for a bigger minority stake in Occidental. Corporations with a stake of at least 20% in another company are eligible to deduct 65% of dividends received, up from the standard 50%.
Berkshire’s 20% stake also allows it to include a proportionate share of Occidental’s earnings in its own results. That could give its earnings a multibillion-dollar boost annually, based on analyst estimates of Occidental’s earnings. Before the most recent purchases, disclosed this month, Occidental fell below the 20% threshold for both benefits.
Since Berkshire started buying Occidental shares in February, Mr. Buffett has had a friendly and collaborative relationship with Ms. Hollub, and the pair speak regularly, according to people familiar with the matter.
When Mr. Buffett bought another slug of Occidental shares this spring, he called Ms. Hollub to let her know about the transaction, according to one of the people. Ms. Hollub was driving at the time and pulled over to take the call, the person said.
Mr. Buffett’s message was simple: “Keep doing what you’re doing,” he told Ms. Hollub.
Berkshire’s growing ties with Occidental have an unexpected link to Mr. Buffett’s earliest days of investing.
At age 11 in 1942, Mr. Buffett made his first investment: three shares of Cities Service’s preferred stock. Forty years later, Occidental went on to acquire the oil company, which Ms. Hollub had just joined the year before.
Mr. Buffett’s investment in Occidental this year shows his first stock purchases “coming full circle 80 years later,” Mr. Kass said.
—Benoît Morenne contributed to this article.
Write to Akane Otani at akane.otani@wsj.com, Christopher M. Matthews at christopher.matthews@wsj.com and Cara Lombardo at cara.lombardo@wsj.com
In a regulatory filing Friday, the Federal Energy Regulatory Commission said that Berkshire Hathaway had asked for and received its permission to buy up to 50% of the driller’s shares. Berkshire has been loading up on Occidental’s shares this year, amassing roughly 20% of the company’s stock, public filings show, leaving many analysts to speculate whether Mr. Buffett would seek control of the company, one of the largest U.S. oil producers.
Occidental’s shares jumped to lead stock gains among the S&P 500 Friday, rising 9.9% after the publication of the ruling. The company’s stock has risen about 146% this year, far and away tops in the S&P 500 stock index, which is down 11% this year.
Berkshire requested the authorization on July 11 and said at the time it owned approximately 18.72% of the outstanding common shares of Occidental, according to the federal ruling. Berkshire has since added shares and earlier this month said in a securities filing that it held roughly 20% of Occidental’s common stock. Berkshire also owns warrants to buy another big slug of Occidental’s common stock as well as $10 billion worth of preferred shares that pay Berkshire about $800 million annually, filings show.
“It is concluded that the Proposed Transaction is consistent with the public interest,” Carlos D. Clay from the FERC’s Office of Energy Market Regulation wrote in the filing.
A spokesman for Occidental confirmed that Berkshire could now buy up to 50% of common shares and didn’t comment further. A Berkshire Hathaway representative didn’t respond to a request for comment.
Mr. Buffett has invested billions in renewables such as wind-farm projects through Berkshire’s energy unit and has also added oil companies to the holding company’s portfolio in recent years.
Chevron Corp.
is now one of Berkshire’s largest stock investments.
Occidental has raked in high profits from elevated oil prices, netting $3.7 billion in the second quarter. The profits are a dramatic turnaround for the company, which lost around $14.8 billion in 2020 after the global pandemic gutted oil demand. Berkshire’s stock purchases, as well as that of the many investors who follow Mr. Buffett’s moves, have helped lift Occidental’s shares to the head of the broad rally in energy stocks.
Occidental’s ill-timed $38 billion deal to take over rival Anadarko Corp. in 2019 loaded the company with debt, leaving it in a perilous position as oil prices tumbled during the pandemic. Chief Executive
Vicki Hollub
made deep spending cuts over the past two years, moved to rein in growth and focused on using cash to pay down debt.
The company has repaid $8 billion in debt this year to bring it to $22 billion, down from nearly $36 billion a year ago, according to the company and analysts. Occidental’s endeavor to reach investment-grade status and its cash-generating capabilities have made it an attractive target for Mr. Buffett, said Neal Dingmann, an analyst with Truist Securities. “It’s a great sort of hedge against a lot of his other businesses to own such a high free-cash-flowing business,” he said.
Occidental has raked in high profits from elevated oil prices, netting $3.7 billion in the second quarter.
Photo:
Reuters Staff/REUTERS
Mr. Buffett has made no secret of his admiration for Ms. Hollub, describing her as one of the best executives in the business. In 2019, he acquired $10 billion in preferred stock to help the company pay for the Anadarko deal.
“What Vicki Hollub was saying made nothing but sense,” Mr. Buffett said at Berkshire’s annual shareholder meeting in April. Occidental looked like “a good place to put Berkshire’s money,” he added.
Mr. Buffett had to show his hand to the market because power plants controlled by both Occidental and Berkshire Hathaway feed the same grid in Louisiana. Occidental owns a power plant in Taft, La., that feeds its chemical plant next door. Leftover power is sold on the local grid, which Berkshire Hathaway Energy plants also feed.
FERC ruled that since Occidental’s plant accounts for just 0.48% of the capacity connected to the region’s grid, a combination with Berkshire “will not have an adverse effect on competition” in the local electricity market. Mr. Buffett had to ask, though, before beefing up Berkshire’s Occidental stake.
In recent years, Occidental has ventured into renewables through its Oxy Low Carbon Ventures unit. This new focus dovetails with Berkshire’s own investments in renewable energy and puts Mr. Buffett’s company in a position to benefit from tax breaks, said
Bill Smead,
chief investment officer at Smead Capital Management.
“We see Berkshire’s filing as a vote of confidence in the oil macro and the value proposition in energy equities,” said Kevin MacCurdy, a managing director at investment firm Pickering Energy Partners.
Write to Benoît Morenne at benoit.morenne@wsj.com and Ryan Dezember at ryan.dezember@wsj.com
WTI crude oil prices fell to their lowest point since early February on Thursday, giving up virtually all gains since Russia invaded Ukraine. WTI crude for September delivery tumbled -1.5% to close at $89.26/bbl while Brent crude for October delivery fell -2.1% to $94.71/bbl.WTI crude has lost ~9.5% over the course of the week, marking thelargest one-week percentage decline since April amid growing fears that oil demand will collapse when western nations descend into a full-blown recession.
While oil producers are certainly beginning to feel the heat, it’s refiners like Valero Energy (NYSE: VLO), Marathon Petroleum Corp.(NYSE: MPC), and Phillips 66 (NYSE: PSX) who have been hardest hit by the pullback thanks to a sharp decline in their refining margins aka crack spreads.
For months, refiners have been enjoying historically high refining margins, with the profit from making a barrel of gasoil, the building block of diesel and jet kerosene, hitting a record $68.69 in June at a typical Singapore refinery. The margin later settled in the high 30s a few weeks later, a level still nearly four times higher than the $11.83 at the end of last year, and some 550% above the profit margin at the same time in 2021.
But crack spreads have now gone into full reverse: according to Refinitv data, Asian gasoline margins plunged more than 102% in July to a discount of 14 cents a barrel to Brent crude, a far cry from a premium of $38.05 a barrel they reached in June. Asian refining margins have now crashed to just 88 cents a barrel over Dubai crude, from a record $30.49 in June.
The effect: a sharp rise in inventories from the United States and Singapore to Amsterdam-Rotterdam-Antwerp.
Refiners are being forced to cut gasoline output to minimize losses and switch to producing more profitable fuels.
Indeed, Taiwan’s Formosa Petrochemical Corp.(6505.T), Asia’s top fuel exporter, is planning to reduce operating rates at its residue fluid catalytic cracking (RFCC) units by 5% in the coming weeks, with a Formosa spokesman telling Reuters that the company plans to sell more very low sulphur fuel oil (VLSFO) due to higher margins for those products.
The Big Conspiracy
The collapse in oil prices has been so epic and unexpected that some oil pundits are now accusing the Biden administration of fabricating low gas demand data in a bid to hammer oil prices.
To wit, in late June the EIA shut down reporting for several weeks, ostensibly due to a server malfunction. But as ForexLive has pointed out, gasoline demand data has been consistently bad ever since the EIA returned: “Maybe there’s an issue with reporting or maybe it’s a conspiracy“, ForexLive has declared.
Even Wall Street has begun questioning the EIA data.
Bank of America energy strategist Doug Legate has published a note titled the “fall of gasoline demand appears grossly exaggerated.’’
“For the week ending July 22nd, implied gasoline demand rebounded to 9.2 million b/d – a 1 million b/d increase vs the last two week average, and the second highest level of 2022,” BofA wrote in the note to clients. Curiously, the EIA reported a steep drop in gasoline demand shortly thereafter, prompting Piper Sandler global energy strategist to label the data “crooked”, saying the methodology left “significant room for error”.
Related: What’s Really Happening With Gasoline Demand?
“We are supposed to believe that in July, in the middle of driving season we are only using 8.6 million barrels per day. That would be down half a million barrels a day from May of this year; that would be below the Covid low of 2020,” Sandler noted. “So we ask all the refiners, we ask all the retailers, we ask everybody that reported earnings this season. Every single one of them tells you that their sales are not down materially from even pre-covid days. Some report record high sales,” he added.
Piper Sandler’s allegations are buttressed by U.S. refining giant Valero. Asked about falling gasoline demand at the company’s earnings call last week, CEO Gary Simmons had this to say:
“I can tell you, through our wholesale channel there is really no indication of any demand destruction… In June, we actually set sales records. We read a lot about demand destruction and mobility data showing in that range of 3% to 5% demand destruction. Again, we’re not seeing it in our system.”
Further, alternate demand data from GasBuddy deviates considerably from EIA’s. GasBuddy tracks retail gasoline demand at the pumps in the U.S. According to GasBuddy, there was a 2% rise in gasoline demand last week, making it the strongest demand of the year. In sharp contrast, the EIA reported a 7.6% drop in demand for the same time period.
The Biden administration certainly is gunning for even lower fuel prices. In aninterview with Bloomberg on Tuesday, Amos Hochstein, the White House’s senior adviser for global energy security, said that gas and oil prices need to go even lower while U.S. producers and OPEC+ need to raise output.
But as Adam Button, chief currency analyst at Forexlive, notes, it’s the Biden administration calling the shots now, and “at the end of the day, traders have to trade what’s in front of them”.
“Right now it’s a crude chart that’s breaking support after a major period of consolidation — that’s not good. The calls for a recession are growing louder crude demand has a long history of following global growth. There are supply factors that will eventually be bullish — like the SPR releases ending in October — but that’s months away and OPEC is still adding some barrels,” he said.
BERLIN—Russian natural gas began flowing again at a reduced volume through a critical pipeline into Europe on Thursday, according to its operator, buying time for governments to decouple from the Kremlin’s exports amid what they expect will be an increasingly unreliable supply of energy from Moscow heading into the winter.
The Nord Stream pipeline connecting Russia with Germany under the Baltic Sea resumed operation after its annual maintenance, ending 10 days of tense speculation about whether President
Vladimir Putin’s
regime would cut off the gas flow to Europe in retaliation for Western sanctions after his invasion of Ukraine.
The operator, Nord Stream AG, said the pipeline was in the process of restarting, which would take a few hours. “Gas is flowing,” a spokesman for the operator said.
The spokesman said flows are expected to be at pre-maintenance level of around 40% of total capacity, but it would take a few hours to reach that volume. One of the German network operators, NEL Gastransport GmbH, later said Thursday that this volume of gas was currently flowing through the pipe, as also confirmed by Nord Stream’s own online monitoring tool.
The German energy regulator said gas flows could reach 40% of capacity Thursday.
“Unfortunately, the political uncertainty and the 60% cut from mid-June remain,” the regulator’s head, Klaus Müller, said on Twitter.
The restart sent wholesale European natural-gas prices down 5% Thursday to €154.55, the equivalent of about $157.50, a megawatt-hour. Including Thursday’s fall, prices have fallen by 14% over the past week but have more than doubled this year and are more than four times as high as 12 months ago. The rally has propelled electricity prices to historic highs across Europe. Broader financial markets were steady Thursday as investors awaited earnings reports from major U.S. companies and an expected interest-rate increase by the European Central Bank.
A compressor station in Mallnow, Germany.
Photo:
filip singer/Shutterstock
The pipeline has been operating below capacity since Russia began throttling supplies in June, invoking technical issues related to Western sanctions against Russia.
Mr. Putin earlier this week said Russia would meet its contractual obligations for gas deliveries to Europe. The Nord Stream pipeline is the main conduit for Russian gas into Europe. Mr. Putin also warned that Western sanctions adopted to punish Russia in the wake of the invasion could cause further disruptions and cap pipeline volumes as low as 20%.
European officials and executives had worried the pipeline might not restart at all, or do so at even lower volumes. While gas is now flowing again, how much Russia sends—and for how long—will be closely watched by European capitals, who are in the midst of filling reservoirs for the higher-demand winter just a few months away.
An abrupt cutoff would have pushed Germany, Europe’s largest economy and industrial powerhouse, and several of its neighbors into a severe recession, according to most economists. But even reduced flows and the uncertainty regarding future supplies mean governments may still be forced to ration energy and subsidize mounting costs for households, experts and officials say.
Nord Stream channels gas extracted from Siberia by state-controlled Gazprom PJSC.
Mr. Putin this week blamed the drop on the absence of a turbine that had been held up in Canada after undergoing repairs because of Western sanctions, but is now on its way back to Russia.
Berlin and most Western experts said the cut in supplies was an attempt to pressure the West into easing sanctions and to push up gas prices. Several German officials and a Gazprom manager in Europe told The Wall Street Journal that Nord Stream had an elaborate contingency system with at least one spare turbine available at all times.
German officials say they expect the pipeline to continue to operate at its reduced pre-maintenance capacity—a level they think was deliberately set to prevent Germany and others from building up enough gas reserves for the winter. Because of technical reasons related to the pressure levels in the pipeline, Nord Stream can’t transport volumes below 30% of its capacity of 55 billion cubic meters a year.
A German government minister said that Mr. Putin was deliberately causing anxiety in the global energy markets, but that he was unlikely to sever supplies completely because it would remove his leverage and risk a harsher response from the West.
The reduced flows and uncertainty are already hitting Germany’s economy. The largest gas utility,
Uniper SE,
is in bailout talks with the German government. The company said Monday that it had drawn down a €2 billion, or $2.04 billion, credit line with German state-owned KfW bank. A German Economy Ministry spokesperson said Monday that the government was working with Uniper and its Finnish parent,
Fortum Oyj,
to find ways to help the company.
Germany and other European Union nations, which pledged to end purchases of Russian energy by 2024, are now working on two basic contingency plans.
The Nord Stream pipeline has been operating below capacity since Russia began throttling supplies in June.
Photo:
Markus Schreiber/Associated Press
The first envisages a status quo, with Nord Stream operating at around 40% of its capacity. Under that scenario, Germany, where gas storages are currently 65% full, would have to significantly reduce consumption compared with the previous year to avoid a shortfall in the winter. Some regions, however, are expected to be more severely affected, possibly triggering local measures such as limited factory shutdowns and a cut in supply to some businesses.
Under this scenario, Germany would be unable to completely fill its reserves before year-end, leaving the country vulnerable to new surprise supply cuts and keeping energy prices high.
This could be politically explosive for Berlin, with some 66% of Germans currently feeling that the government isn’t doing enough to tackle high energy prices, while 53% believe the sanctions are hurting Germany more than Russia, according to a Forsa poll published on Wednesday.
“We need to prepare for a war economy…the next two winters will be difficult,” said
Günther Oettinger,
a former chief energy official of the EU and German politician. “Our very democracy is in danger of disruption from the energy costs fallout.”
The second scenario, seen in Berlin as less likely according to German officials, foresees an end to Russian gas supplies before the end of the year, triggering an emergency plan that would allow Chancellor
Olaf Scholz
to take control of the gas market and ration consumption.
Under legislation that protects households and critical infrastructure, rationing would hit mainly businesses, leading to a drop in Germany’s gross domestic product of between 5% and 6% in 2023, according to estimates by
Deutsche Bank.
With many European countries that depend on Russian gas reliant on supplies transiting through Germany, irregular or dwindling supplies through Nord Stream would have effects across the continent.
The EU this week issued guidelines recommending measures to cut gas consumption by 15% between August 2022 and March 2023, including by limiting the temperature in office spaces to 66 degrees this winter.
Germany’s immediate neighbors are working on their own contingency plans.
Germany and Austria negotiated a deal to share their gas-storage capacity and help each other’s regions that are at risk of fuel shortages.
“Russian dictator Vladimir Putin is using energy as a weapon against us. It is clear that the cooperation with Germany, through which almost all gas flows to us, will be essential for us in this direction,” Josef Sikela, the minister of industry and trade of the Czech Republic, told reporters earlier this month.
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Europe is also adjusting its gas infrastructure, which has so far been largely geared to receive supply from Russia. Belgium and Germany are working to expand the capacity of a pipeline connecting the two nations, while Austria and Italy are looking into importing their infrastructure to be able to channel more Norwegian gas into their storage.
The Netherlands, once among the world’s largest gas producers, is considering temporarily prolonging the life of a gas field scheduled for closure after mining work there caused numerous earthquakes.
Many governments are trying to secure gas from other suppliers, from Norway to Algeria, the U.S. and Qatar, which often comes in the form of liquefied natural gas transported by ship.
Germany is building several LNG terminals on its coast to receive shipments from faraway countries and has chartered five floating terminals that can handle those inflows in the short term. Increased LNG purchases by EU nations—Germany alone is investing over €15 billion—have caused a shortage on the global market, leaving countries such as Pakistan struggling to access supply.
Berlin, meanwhile, has said it would review its decision to shut down its three remaining nuclear-power plants. It is already planning to increase use of coal to produce electricity this winter to save gas for heating.
Write to Bojan Pancevski at bojan.pancevski@wsj.com and Georgi Kantchev at georgi.kantchev@wsj.com
said Russia would fulfill its commitments to supply natural gas to Europe but warned that flows via the Nord Stream pipeline could be curbed soon if sanctions prevent additional maintenance on its components.
Nord Stream, the main artery for Russian gas to Europe, is currently down due to regular maintenance and European governments are worried the Kremlin won’t restore its flow when the work ends Thursday. A prolonged outage could prompt governments to ration energy, hurting industry and hitting already fragile economic growth.
In comments late Tuesday after his visit to Tehran, Mr. Putin said that Kremlin-controlled energy exporter Gazprom PJSC, pipeline operator’s majority shareholder, “has always fulfilled and will fulfill all of its obligations.”
But the Russian president added that flows might fall to some 20% of capacity as soon as next week if a pipeline turbine that was undergoing repairs in Canada isn’t returned to Russia soon. Mr. Putin said that another turbine had to go for maintenance on July 26.
Even before the maintenance began, Gazprom last month cut deliveries on the pipeline to 40% of its capacity, blaming Canadian sanctions that had prevented the return of the turbine being repaired there. European officials have dismissed the turbine explanation as a pretext for Moscow to try and wreak economic havoc on the continent.
Germany has been racing to return the turbine to Russia after Canada earlier this month tweaked its own sanctions, allowing turbines for the Nord Stream pipeline to be repaired and returned to Russia.
The European Union is pressing governments to step up their energy-conservation campaigns, rolling out new plans for possible rationing on Wednesday. The commission’s plan is expected to offer guidelines for curbing energy use and establish criteria governments can use to determine which industries to give priority to if there isn’t enough gas to go around. The guidelines also call for public buildings to limit air conditioning to 77 degrees Fahrenheit and cap thermostats at about 66 degrees during colder months.
Gazprom has invoked force majeure for its failure to deliver contractually agreed natural-gas shipments in recent weeks, according to European energy companies. It isn’t clear whether the notice—a legal declaration that exempts the company from fulfilling contractual obligations because of circumstances outside its control—covers a potential decision by Russia not to resume Nord Stream flows after the maintenance.
While some European officials have in recent days cast doubt on whether Nord Stream would come back online on Thursday, Mr. Putin’s comments helped fuel expectations the pipeline would restart. Separately, flows of gas through the pipeline spiked several times on Tuesday, which analysts say could be pressure tests ahead of the end of the maintenance.
Analysts at Goldman Sachs said they expected the pipeline to come back online Thursday at its pre-maintenance capacity of 40%.
A full stop “would remove flexibility from Russia’s supply decisions, once you’re at zero, there’s only one place to go: up,” the bank wrote in a note to clients on Tuesday, adding that such a scenario would also deprive Russia of gas revenues.
But Mr. Putin’s new warning that the flows could be curbed to 20% next week shows that Moscow will continue to use gas to squeeze Europe, even if it doesn’t completely cut it off, analysts say.
“It’s absolutely clear that Moscow is cutting supplies for geopolitical reasons—it wants to create a European gas crisis this winter to bring Europe to its knees to the point where it cuts support to Ukraine and forces Kyiv to concede to Moscow’s demands,” said Timothy Ash, senior strategist for BlueBay Asset Management LLP in London.
Mr. Putin also warned the West that its plan to cap the prices of Russian oil would rock global markets and push prices up.
“Now we are hearing all sorts of crazy ideas about limiting the volume of Russian oil and capping the Russian oil price,” Mr. Putin said. “Oil prices will skyrocket,” he added.
Write to Georgi Kantchev at georgi.kantchev@wsj.com
U.S. consumer inflation accelerated to 9.1% in June, a pace not seen in more than four decades, adding pressure on the Federal Reserve to act more aggressively to slow rapid price increases throughout the economy.
The consumer-price index’s advance for the 12 months ended in June was the fastest pace since November 1981, the Labor Department said on Wednesday. A big jump in gasoline prices—up 11.2% from the previous month and nearly 60% from a year earlier—drove much of the increase, while shelter and food prices were also major contributors.
The June inflation reading exceeded May’s 8.6% rate, prompting investors and analysts to debate whether the Fed would consider a one-percentage-point rate increase, rather than a 0.75-point rise, later this month. Slowing demand is key to the Fed’s goal of restoring price stability in an economy that is still struggling with supply issues, but raising interest rates also elevates the risk of a recession.
Core prices, which exclude volatile food and energy components, increased by 5.9% in June from a year earlier, slightly less than May’s 6.0% gain, the Labor Department said.
As inflation climbs in the U.S., rising food and energy costs have pushed the nation’s most popular price index to its highest level in four decades. WSJ’s Gwynn Guilford explains how the consumer-price index works and what it can tell you about inflation. Illustration: Jacob Reynolds
On a month-to-month basis, core prices rose 0.7% in June, a bit more than their 0.6% increase in May—a sign of inflationary pressures throughout the economy.
“Inflation makes everything difficult,” said
Lara Rhame,
chief U.S. economist for FS Investments. “It erodes your savings, your wages, your profits. It’s punishing everybody.”
Stocks declined on Wednesday after wavering for much of the day, with the S&P 500 index falling by 0.5%. Bond yields jumped following the inflation report, but yields on longer-term Treasurys quickly gave up those gains.
Despite June’s inflation reading, economists point to recent developments that could subdue price pressures in the coming months.
Investor expectations of slowing economic growth world-wide have led to a decline in commodity prices in recent weeks, including for oil, copper, wheat and corn, after those prices rose sharply following the Russian invasion of Ukraine. Retailers have warned of the need to discount goods, especially apparel and home goods, that are out of sync with customer preferences as spending shifts to services and away from goods, and consumers spend down elevated savings.
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“There’s a pretty serious recession fear affecting a broad range of asset prices,” said
Laura Rosner-Warburton,
senior economist at MacroPolicy Perspectives.
Retailers’ ability to shed unwanted inventory could test whether pricing is returning to prepandemic patterns, Ms. Rosner-Warburton said. Some retailers, such as Target, have already said they are planning big discounts. Others with robust warehouse capacity, such as Walmart Inc., could be more likely to hold on to their excess inventory, analysts say.
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“It would be really important if we do see discounting return, because it would show that we weren’t that far away from the pre-Covid environment in terms of pricing behavior,” Ms. Rosner-Warburton said.
Discounts haven’t shown up prominently in inflation figures so far: Prices for apparel and home goods both rose last month. New and used car price increases, a significant source of upward pressure on inflation, both eased on a month-to-month basis in June.
The Fed last month raised its interest-rate target by 0.75 percentage point, the largest increase since 1994. Besides tempering demand, the central bank is trying to prevent consumer expectations of higher inflation from becoming entrenched, as such expectations can be self-fulfilling. Fed Chairman
Jerome Powell
has said the central bank wants to see clear evidence that price pressures are diminishing before slowing or suspending rate increases.
Persistent high inflation is putting a strain on businesses and consumers who, after decades of price stability, aren’t used to it.
Dan Waag,
55 years old, the owner of Arlene’s Sunny Side Cafe in Alcester, S.D., made the difficult decision to close for a week after concluding that a drop in the number of customers was leaving the restaurant’s finances in the red.
“I know these are tough times with this inflation, little to no rain for the farmers, gas prices as high as they are,” he wrote to his customers on Facebook.
Mr. Waag attributes the slowing demand to a poor season for the corn and bean farmers in the area, and the added toll of higher gasoline prices that might make an outing to his restaurant an unaffordable luxury. He hasn’t changed his prices yet, but with his own rising costs and a drop in daily revenue from around $600-$700 to $300-$400, he feels he may have to soon.
High inflation and a poor farm season have driven Dan Waag to close Arlene’s Sunny Side Cafe in Alcester, S.D., for a week.
Photo:
Dan Waag
By closing for a week, he said he is betting customers will realize the value of having a non-fast food restaurant in their town of around 800 people. “I’m trying to show people, ‘This is what it will be like if I have to stay closed,’ ” Mr. Waag said.
Consumer inflation expectations have improved somewhat, according to a Federal Reserve Bank of New York survey this week. Americans expect slower inflation increases over the longer run than they had in recent months. The bank said in its June Survey of Consumer Expectations that respondents see the annual inflation rate three years from now at 3.6%, down from their expectation in May of 3.9%. The bank also said respondents expect the annual inflation rate five years from now to be 2.8%, down from their May expectation of 2.9%.
Higher interest rates won’t have the same effect on all prices simultaneously, economists say. Costs such as mortgages and rents—a big part of household budgets—respond over time to the demand-sapping effects of higher interest rates. Shelter costs rose by 0.6% in June over the prior month, the same rate as they did in May. The rent index rose 0.8% over the month, which was the largest monthly increase since April 1986.
Housing inflation is important because it represents around 40% of core CPI and around 17% of the Fed’s preferred inflation gauge, the personal-consumption expenditures price index.
“High rents are really troubling because they’re locked in once every year or once every two years, and that’s what leads people to go ask their boss for higher wages,” said Ms. Rhame.
Wages aren’t keeping up with inflation. With annual wage growth at 5.1%, average hourly earnings adjusted for inflation are declining at their fastest pace in four decades. After accounting for seasonal and inflation adjustments, average hourly earnings decreased 3.6% from June 2021 to June 2022.
Record home prices and higher mortgage rates in May made it the most expensive month since 2006 to buy a home. Those conditions are leading prospective buyers to drop out of the market for now. But with limited supply and continued demand, it may take months before housing prices see significant declines.
“We entered this year with so much more demand than supply—even with many home buyers unable to compete in the market, there’s still a lot of buyers,” said
Bill Adams,
chief economist at Comerica Bank.
Write to Gabriel T. Rubin at gabriel.rubin@wsj.com
