The continuing slide in the US coal and oil industries has had a direct impact on the earnings of the mighty empire of Warren Buffett. Speaking at his company, Berkshire Hathaway’s annual meeting in Omaha at the weekend, Buffett said the company’s preliminary first-quarter profit fell about 12%, hurt by weaker performance in its huge railroad and insurance operations.
Buffett gave the update on March quarterly earnings, which will be released in full this Friday night, our time.
He provided the outline to the annual meeting, which this year was held a week earlier than normal (it is usually held a day after the first quarter results are released).
Buffett said Berkshire’s quarterly operating profit fell to $US3.73 billion from $US4.24 billion a year ago.
Net income rose by around 8% $US5.59 billion from $US5.16 billion, helped by a gain from the swap of Procter & Gamble Co stock for the Duracell battery business. That deal closed during the quarter.
Buffett said the 12% fall in operating profit came as Burlington Northern Santa Fe railroad was hurt by declining oil prices and coal shipments, while hailstorms caused losses in Berkshire insurance units.
“Railroad carloading throughout the industry – all of the major railroads – were down significantly in the first quarter, and probably almost certainly will continue to be down for the balance of the year,” Buffett said on Saturday.
As well Burlington had, like the rest of the US railroad industry, been hit by the slide in demand for oil and the slow fall in domestic production thanks to the downturn in oil prices.
US railroad companies had invested billions of dollars in new oil rail cars and loading facilities to handle the surging in US oil production generated by the oil shale sector – especially in North Dakota, parts of the Midwest and Texas.
With US production now sliding (its well under 9 million barrels a day and was above 9.4 million barrels a year ago), the demand for rail cars has dropped off.
And the same is happening in coal where demand from the US power sector (which includes Berkshire’s own energy operations in the midwest) has fallen sharply as demand for cheaper and cleaner gas has soared in the past two years.
US coal production is falling, demand is also weak because of the drop off in international demand and as a result most of America’s major coal producers are bankrupt or being restructuring – Peabody Energy, the world’s largest privately-owned coal group being the most recent and the most notable.
Looking at the Berkshire AGM, Buffett repeated previous comments that the company would look at buybacks if the shares fell to far. He told around 40,000 shareholders (the meeting was also streamed on Yahoo and was also translated into Mandarin and broadcast around the world in that language) said the odds were “extremely high” that Berkshire would buy back “a lot” of its stock if the price fell below 1.2 times book value, a level it recently approached.
According to Reuters, Buffett also said he would consider raising the threshold “little” if he found Berkshire with so much money that it "burns a hole in your pocket."
He said that could happen if Berkshire’s cash hoard rose to $US100 billion or $US120 billion, a level it has never reached and perhaps double what it is now, following January’s $US32-billion purchase of industrial parts maker Precision Castparts Corp.
"The stock is worth significantly more than 1.2" times book value," he said.
Marketwatch.com has a good blog summary of the meeting here (http://blogs.marketwatch.com/thetell/2016/04/30/live-blog-warren-buffett-at-berkshire-hathaway-annual-meeting/).
