Author Topic: OXY - Occidental Petroleum  (Read 21820 times)

compoundvalue

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Re: OXY - Occidental Petroleum
« Reply #80 on: October 20, 2020, 09:26:43 AM »
On warrant pricing I think people (myself included) tend to underestimate value of long dated options. A lot of things can happen in almost 7 years. Some potential scenarios may entail a share price that would be much higher than $32 (again 7 years time horizon). As for all the warrant unfriendly and outright dumb things mgmt. and board can do in the interim, Icahn with significant skin in the game (including the warrant) and 3 board members isn't the worst partner one can have for this kind of journey, nevertheless it's definitely a risk that has to be taken into account

Take $32, which is a 3x gain on the stock. Warrant is $3 and at $32 stock, the warrant has a $10 value. Not much difference in gain.

I know, that's the reason I used it as break even point as mentioned before by aryadhana


lnofeisone

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Re: OXY - Occidental Petroleum
« Reply #81 on: October 20, 2020, 09:55:54 AM »
On warrant pricing I think people (myself included) tend to underestimate value of long dated options. A lot of things can happen in almost 7 years. Some potential scenarios may entail a share price that would be much higher than $32 (again 7 years time horizon). As for all the warrant unfriendly and outright dumb things mgmt. and board can do in the interim, Icahn with significant skin in the game (including the warrant) and 3 board members isn't the worst partner one can have for this kind of journey, nevertheless it's definitely a risk that has to be taken into account

Take $32, which is a 3x gain on the stock. Warrant is $3 and at $32 stock, the warrant has a $10 value. Not much difference in gain.
$32 is a funny number. If one is bullish OXY, these warrants only make sense if you think OXY stock will go over $32. For example, @$50 return on the stock is $40, and return on warrants is ~$75 (assuming same initial investment). This is an interesting idea as OXY is in a hated space and even if it does start to deleverage it will probably trade very similar to KMI which has been in deleveraging for some time now. I suspect the stock will either stay flat or rebound a tad and trade in a range. Interestingly, OXY has 2023 22 calls that are trading and those are trading at a premium to this warrant. Might make sense to defray the cost of the warrant by selling 2023 22 calls.

aryadhana

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Re: OXY - Occidental Petroleum
« Reply #82 on: October 20, 2020, 11:26:00 AM »
That's true.  My gut feeling is that the risk-reward on the warrants somehow still doesn't work out.  By that I mean levering yourself into the stock seems better than the warrant.  For the numbers you suggested, that would entail something like 2x leverage right now.  The latter would be a great trade even if OXY traded up to just $20 over the next year and remained confusingly volatile thereafter.  It would be a great trade even if there's an acquisition that wipes out much of the warrant's option value.  A relatively large margin call would likely mean warrant value is also down a lot, and much of the risk can be mitigated with a few OTM puts.   
« Last Edit: October 20, 2020, 11:31:40 AM by aryadhana »

aryadhana

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Re: OXY - Occidental Petroleum
« Reply #83 on: October 20, 2020, 11:30:33 AM »
Quote
Interestingly, OXY has 2023 22 calls that are trading and those are trading at a premium to this warrant. Might make sense to defray the cost of the warrant by selling 2023 22 calls.

The bid/ask I see on the Jan 23 22C is 1.49/1.88 which is below the warrant price of about 2.94. 

lnofeisone

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Re: OXY - Occidental Petroleum
« Reply #84 on: October 20, 2020, 12:10:42 PM »
Quote
Interestingly, OXY has 2023 22 calls that are trading and those are trading at a premium to this warrant. Might make sense to defray the cost of the warrant by selling 2023 22 calls.

The bid/ask I see on the Jan 23 22C is 1.49/1.88 which is below the warrant price of about 2.94.

At premium here was meant that 1.49/1.88 (say you get $1.65) is richly priced for a 2 year out option when 7 years out trades at 2.94.

cashisking

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Re: OXY - Occidental Petroleum
« Reply #85 on: October 21, 2020, 12:29:19 PM »
That's true.  My gut feeling is that the risk-reward on the warrants somehow still doesn't work out.  By that I mean levering yourself into the stock seems better than the warrant.  For the numbers you suggested, that would entail something like 2x leverage right now.  The latter would be a great trade even if OXY traded up to just $20 over the next year and remained confusingly volatile thereafter.  It would be a great trade even if there's an acquisition that wipes out much of the warrant's option value.  A relatively large margin call would likely mean warrant value is also down a lot, and much of the risk can be mitigated with a few OTM puts.

Thank you for the perspective. Interestingly, OXY common has higher margin requirement (75% for me) than OXY-w (50%). This alone makes it less capital efficient to execute with margin I think.

Also the warrant comes with its own put (cant lose more than the warrant), and the loan portion is quite cheap at ~180 bps borrowing cost per year (and is "fixed" in the sense that its paid up front)..

In terms of getting to $22 - reversion to even 1x book (average close to 2x over last 10 years) would take the shares to 14. One of many possible scenarios, but at that point I would expect the time value to be much higher - reflecting higher probability of being in the money.. So lets say the stock is now at 14 and there is 5.5 years left - the warrants might cost closer to 500bps - at $6.8 ((1.05^5.5)-1*22).

I think cash+warrant is better than margin+common. Total exposure of 2 units cash and 1 unit warrant feels right to me..


ValueMaven

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Re: OXY - Occidental Petroleum
« Reply #86 on: October 21, 2020, 05:23:42 PM »
What happens to Berkshires pref assuming OXY goes chapter 11??  Stock is below $10 at this point - huge leverage.  OXY bonds are trading in the 50-60 cent range.  Looks like if Berk had to mark-to-market their pref, it would be down about 50%

Jurgis

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Re: OXY - Occidental Petroleum
« Reply #87 on: October 22, 2020, 08:04:27 AM »
What happens to Berkshires pref assuming OXY goes chapter 11??  Stock is below $10 at this point - huge leverage.  OXY bonds are trading in the 50-60 cent range.  Looks like if Berk had to mark-to-market their pref, it would be down about 50%

OXY bonds are not trading in 50 cent range. The cheapest are 2039s or so at 67 cent range+. The prices on OXY bonds were way lower earlier in the year when I bought (and since sold).

Not picking on you, just a note to myself, since I thought maybe I could buy again.  ::)
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