Here’s the latest from Canadian Value Investors!
Portfolio Update
PBR Petrobras – Quick Note
Three Special Situations – YI, MTCR, MAXR
Charlie Munger at the 2023 Daily Journal AGM Notes
Favorite chart of the week – Fastest IPO bankruptcies of the SPAC boom. Some of these are just egregious. For example, Electric Last Mile IPO’d at a market cap of $1.4 billion through a reverse SPAC. https://www.cnbc.com/2021/06/28/electric-last-mile-is-the-latest-speculative-ev-company-to-go-public.html If you are curious what investors were told, here is the S-1 filing for the IPO. https://www.dropbox.com/s/f6w9oyfyjovc58s/20230304%20Electric%20Last%20Mile%20Solutions%20Inc._S-1A_2021-03-31_English.pdf
Portfolio Update
Petrobras NYSE:PBR.A – Quick Note
See our February 13th post in the website archive for full background of this position.
Since our purchase and post, Petrobras announced their quarterly dividend of R$2.7457336, or roughly 10% for the quarter, albeit a bit of a complex mechanism. We plan to spend our dividend cheque on a Pabst Blue Ribbon family pack. 2022 production was higher than target (2.674MM boe/d vs target of 2.6MM), refinery usage hit five-year highs, methane emissions intensity continues to decline, and they are running the largest offshore carbon capture program in the world. They are also trading at a 2-3x forward P/E. However, we expect this holding will be a rocky ride. https://www.reuters.com/business/energy/lula-bashes-petrobras-dividends-says-firm-invested-almost-nothing-2023-03-02/
Financial reporting, transcript, and presentation are here - https://www.investidorpetrobras.com.br/en/results-and-announcements/results-center/
For example, the government just announced a temporary suspension on asset sales, which does not have any material impact but provides an indication of their mindset. More importantly, the Lula administration also announced a temporary 9.2% export tax on crude for four months, which will eat up about $400MM of that expected cash flow (earnings of ~US$34 billion in 2022 and market cap of US$69B). The political risk is real, but the bet is coming off the table fast.
We are watching the new CEO (government appointed as usual) closely. Here are some Q4 conference call highlights of new CEO Jean Paul Terra Prates responding to tough questions:
Responding to Luiz Carvalho at UBS “how to avoid conflict of interest between the controller, shareholder minorities, politicians and the company best interest in the decision-making process?”
Luiz, first of all, try to change the orientation. You are the sell guy, change that. Well, I think the challenge here, and this question is very good, because it's very common, Luis. Because of the recent past and the not so recent past as well, it is fair to have this kind of impression or conclusion that Petrobras will be subject to politicians, et cetera, et cetera. Not that it was not subject to this in the recent years as well. We had and we have to remember that. We have very recently, 2019-2020, politicians and government making Petrobras to surrender market share in fuels and leaving refineries at half of the capacity. So this is not something that doesn't happen here and there.
Now, the big challenge that we have altogether is to turn the participation of government in Petrobras into our favor, not against us, make our investors have the certainty that to be a partner of the Brazilian state is not a disadvantage on the contrary. It's good.
It gives us good leads to things. It gives us good dialogues and less risk when we go to a new area, to a new horizon when we discuss legislation, regulation when we are present in the regions, when we have to deliver new projects with the communities, with the mayors with the city councils, et cetera, et cetera. This has to be an advantage.
Since it's a reality, and it's not going to change. If somebody doesn't want to be a partner of the state of Brazil, it has other options. People have other options. Then you will be right to say sell. But right now, this is a reality for us, and it never changed. It didn't change on the Lula and the Dilma, on the Bolsonaro, on the Tamar and it will not change with Lula now for sure. So Petrobras will still have the Brazilian state as a majority partner.
That being said, we have to deal with that reality, the best way we can. So this is part of our business.
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So upstream oil and gas will keep being our main focus, this represents already 83% of our investment portfolio. So it may stay about that. I could try to guess, and this is my responsibility individually that we would not, in the short term, not even in the midterm, go over 20% to 25% of that amount in investments into other things, including refineries transformed into biorefineries or natural gas into new segments, but also on offshore wind or bio whatever components in fuels, et cetera, et cetera, renewables in general. This will not be a transition that will make very fast, but certainly has to be a transition that we effectively have to be done -- doing. We cannot stop one day to think about the energy transition. That doesn't mean that we are going to do the transition, all of a sudden. There's a big difference between these two things.
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Petrobras is Petrobras, it's a huge vehicle of investment and investors should look at Petrobras as a secure investment. It may be not the high heat of every day in the markets, but it must be the most secure destiny of the money of our investors. The one that people can trust. The one can -- people can give -- probably can give shares to their sons and run funds.
Maybe we will one day give our shares to our children. In the meantime, announcements like this were expected by us and aren’t helping.
Petrobras on letter from the Ministry of Mines and Energy
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Rio de Janeiro, March 1, 2023 – Petróleo Brasileiro S.A. – Petrobras informs that it received Official Letter 166/2023/GM-MME from the Ministry of Mines and Energy (MME) yesterday requesting the suspension of the sales of assets for 90 (ninety) days, due to the reassessment of the National Energy Policy currently underway and the establishment of a new composition of the National Energy Policy Council (CNPE), respecting the Company's governance rules, commitments made to government entities and without putting Petrobras' interests at risk. The Board of Directors will analyze the ongoing processes, from the standpoint of civil law and within the rules of governance, as well as any commitments already made, their punitive clauses and their consequences, so that the governance bodies assess potential legal and economic risks arising, subject to the rules of secrecy and other applicable governing rules. Relevant facts will continue to be disclosed to the market. Facts deemed relevant will continue to be disclosed to the market.
Special Situations - YI, MTCR, MAXR
Charlie Munger at the Daily Journal AGM
Another great event with Charlie Munger. Highlights below. https://www.youtube.com/live/9VVPO3KWj3A
"California is trying force it's wealthy people and wealthy corporations out of the state, and I must say it's working fine, they're leaving one after another."
On crypto - "Sometimes I call it crypto crappo, sometimes I call it crypto shit. It's just ridiculous that anybody would buy this stuff."
He used leverage for Alibaba and other ideas recently. -
This question comes from Michael Gallagher he says according to company filings it appeared that Alibaba shares were purchased with leverage and when the stock price fell last year he was seemingly forced to sell he being you can you ask Charlie to confirm that it was bought with leverage and if so why would he do that, as it seems to go against his philosophy?
Well yes it's true I operated with no leverage for long stretches of my old age and Warren's the same way. Recently I did use a little bit of leverage here and in another place because the opportunities were so ridiculously good I thought it was desirable to do that. You're right, it's unusual for us. By the way, if you go back early in my career I used some leverage. I sometimes ask myself a mental question; “what is the appropriate percentage of your net worth that you should put in a stock if you think it is an absolute cinch?” If you are the kind of fellow who is right when you think something is a cinch, the answer is 100%, maybe 150%, but nobody teaches people to think that way in finance. But if the opportunity is great enough, the logical answer is 100%. Or maybe 200%.
Q: You have said the three things that ruin people are ladies, liquor, and leverage, so why would you use leverage if that is one of the three things that can destroy somebody? Well, I used a little leverage on my way up and so did Warren by the way. The Buffett Partnership used leverage regularly every year of its life. What Warren would do is he would buy a bunch of stocks, and then he’d borrow against those stocks and used it for event arbitrage liquidations. That was like an independent banking business and Ben Graham name for that was Jewish treasury bills; it always amused me that that is what he would call them. Warren used leverage to buy Jewish treasury bills on the way up and it worked fine for him. Berkshire has stock is Activision Blizzard – whether it will go through or not I don’t know – but that is a Jewish treasury bill. We sort of stopped doing it because its such a crowded place. But here is little Berkshire doing it again and Munger using a little leverage at the Daily Journal Corporation… “The young man knows the rules and the old man knows the exceptions.”
On Alibaba - "I regard Alibaba as one of the biggest mistakes I ever made ... ln thinking about Alibaba, I got charmed by their position in the Chinese internet and didn't stop to realize, 'they're still a God-damned retailer."
"If you're just not crazy, you have an advantage over 95% of the population…If I had to name one factor that dominates human bad decisions, it would be what, I call denial. If the truth is unpleasant enough, their mind plays tricks on them, and they think it is really happening. Of course, that causes enormous destruction of business.”
Is he worried about the future of Berkshire? “I don't worry about it too much because I'm going to be dead."
“Dumb is forever”.