RRJ

Fairfax is doing a lot of acquisitions of tuck in international insurance operations. Growing the float is undoubtedly a good thing, and I suspect the international markets are fair less fully valued than domestic insurers, with more room to run as more Asian economies grow and need more insurance. So seems great to me if they can get the underwriting profit where they need it, and they appear to be doing much better at that as well. But what are the added risks in buying international insurers over domestic ones? There has to be incremental risk to this above what Berkshire faced earlier on in the float growth stage, though it ended up huge in international insurance obviously.

I'll ring in just to say I agree with everything cardboard has said on this thread. I think it is very arrogant to think that such a large number of your countrymen have no point and must be morons, and leave that as your explanation. It takes a real intellectual snob not to at least see some reason behind the big swells of public opinion. No one is so smart or so stupid as to be 100% right or 100% wrong all of the time. Ask yourself, what need of the body politic is being filled by the Trump phenomenon? It may not be your cup of tea, and it might not be pretty, and it might have no class, but it is reality and it is big, and if you add Sanders' votes to it, it is about double that number that are sick of the status quo, but who are more PC minded. People are sick of the existing political elite shoving how they are supposed to think down their throats, on both sides. Another way to put it: we have a jury system that empanels 12 people to come to very difficult decisions. It's imperfect, and it's often ugly, and often seems not to make sense, but if you know enough about what went on in the jury room, usually the jury has a valid reason for what they do. A presidential election is in effect a jury of a hundred and fifty million people. There is a deeper wisdom that, while not apparent to me, is there by its very nature. This should not be dismissed or ignored. To get back to value investing, that would be like ignoring the reality when your stock thesis turns out to have been wrong. It never ends well for you. Better to find out what element you are ignoring and face up to it and admit it too has some merit that you should have considered.

I agree with this and think there is something off about all this. I've been wondering if OPEC's announcement is a policy that Saudi Arabia dictated, or one that was putting a good look on a de factor policy because the other OPEC members (Venezuela, Nigeria) were basically up front telling the Saudis they were not going to curtail output. In other words, was this a strategic decision by the Saudis and OPEC members, or just making the fact that they can no longer exert control over their members look better by making it "our policy." Has anyone got any insight into this possibility and what it would mean if OPEC were losing control of its members (assuming it has not already)? I apologize if this has been covered already on this strand.

If you were asking about my post, I was actually agreeing with frommi and you on this. I see this as a perfectly rational and not that difficult a strategy to execute.

+1. Thanks. rough calc: 2017: 5.2 44/8.5 2018: 4.9 44/9 2019: 4.6 44/9.5 This is the magic of increasing EBITDA with leverage, it decreases the leverage at a faster rate than paying down debt.

Fatbaboon - Yeah, I think you could be right. I suspect their answer is "whatever it takes to truly make Moody's happy." So they can't answer just yet until they walk them through it carefully and see what they say. I really do think your idea of a scrip dividend plus an explicit "no growth for a few years" policy may be enough, and they might go that route. I actually would prefer they cut it, and significantly. I'm a buyer and if stock tanks further, all to the good for me. I want to say my average cost in at this point is something like $21-$22. I'd like to keep averaging down a bit. Saw a video of T Boone Pickens and Carl Icahn. Pickens says oil supply is already dropping and will have to get back up to $70 a barrell in six months. He's usually early. Frankly, I believe management that KMI is not sensitive to oil prices near as much as folks think, so I am not sure how much of a boost it would be. $10 million per dollar increase per barrel. So that would be $300 million if back up to $70. I too am wondering about non-capex growth capacity in pipelines. I suspect it's there, but limited. For the same reason they are so stable with take or pay contracts -- they are longer term contracts, which they take on up to capacity. So with increased pipeline demand it probably takes a while for contracts to roll off and get repriced at higher rates they can charge. Plus regulators wouldn't let them increase too quickly. Now, if you've had a period of no growth for a while and the pipes need reinvestment, then regulators would recognize that and allow some increased rates so that the reinvestment can get taken care of.

Why though? People invest in MLPs for the dividend, and if the dividend is cut, there will be shareholder turnover. This has gone from a 10% dividend growth stock to a dividend cut. At some point this will be a value, but why get into this stock before the market digests the dividend growth story? Putting a 9% target yield (which I see as fair for a 0% growth company) after assuming a 50% dividend cut gives me a FV of $11/share. I do see your point. A dividend cut obviously is tough for dividend investors to stomach and will cause turnover. Much of it might even be forced selling by funds with certain dividend constancy parameters. But who is to say the market has not already been digesting that? I mean it's been hammered like what, 65%? More? As for valuation, I don't agree this is zero growth. It might be zero growth for now, but this is temporary. Their press release does not sound like management in denial, but squarely on top of their situation. They are saying, we have rechecked the numbers twice, and we will have $5billion distributable cash flow for 2016. We could cover our dividend with this as promised, but we have a higher priority first, which is protecting our credit rating. Then taking advantage of growth assets on the cheap. So we will cut the dividend for a while to do those things. At some point, call it four years to be safe, they will start catching up the dividend, and will have the same stellar assets with a better balance sheet and dividend coverage, and will be growing at probably 3% for inflationary average, plus 2% for anticipated natgas growth, plus 1% extra for good management and efficiencies of scale when adding assets from smaller players. So call it 5-6% growth conservatively. If in 4 years I am getting my current dividend of $2.00 again, assuming no growth from today (conservative), and paying $17 a share today, then I would assume the market will have reappraised this stock at some point and see some growth and price it at the historic yield of say 6%. $2.00 / .06 = $33.33 in share price. $17.00 to 33.33 in 4 years is not a bad return, not counting dividends received along the way. And most importantly, this assumes no good surprises along the way, such as oil going back up. And this is kind of a sure thing, or as sure as these things get. I mean, are people going to be living in the US and needing energy? If you see war on the horizon, which Russia desperately wants to raise oil prices, that only helps to have things happen a bit quicker. A good hedge stock for lots of international strife.

I hadn't thought of that but something like that might accomplish two goals at once. I'll admit I'm not quite sure how that would work so I'll research how it was used for KMR. I think that's what another poster mentioned.

All good points to consider, folks. My thinking is similar to thefatbaboon's below. This probably takes a few years of cut dividends to right things. Or they could sell off some assets to do it quickly. Not ideal, but they do have options.

I believe the message sent today by management is that they are NOT dependent on the financial markets to survive and grow. They have $5 billion of distributable cash, confirmed for 2016 even considering current oil and gas prices, with which to fund sustaining cap-ex, the dividend, and purchase of growth. Moody's moved their credit rating to negative after the most recent acquisition of an additional 30% of NGPL, but Fitch and S&P did nothing, finding the deal credit neutral to KMI. They are signalling that they are likely to cut the dividend somewhat, or at least cut the heretofore planned 6% growth in the dividend, in order to alleviate Moody's and retain investment grade credit ratings for all 3 agencies. My guess is they won't have to cut the dividend much to do so, but let's say they cut it in half to $1.00 per share, instead of the $2.00 share dividend paid in 2015. They use funds saved on a dividend cut to purchase assets on the cheap in this sector, or to buy back stock (probably less likely for this company). The added assets will then allow for quicker dividend raises in following years, probably more or less catching up to the current dividend schedule. If you assume they are back to $2.00 in 3 years (current dividend levels), and the stock is trading at a historical yield of 6%, then the share price would be at $33.33 a share. That's a 24% compounded annual return from a buy in price of $17.39 (I bought a decent amount today at that price). Not counting whatever dividends they've paid over those 3 years. Another way of looking at it -- there is a $5 billion cushion they have to play with, and that's a safe $5 billion with roughly 85% of that income locked in or hedged. This is the Amex salad oil scandal--a temporary setback for an asset that has not changed fundamentally at all. Hell, assume the entire dividend is suspended for 2 years -- that's $10 billion worth of cushion, at the end of which you have a fantastic asset that throws off cash, has a virtual monopoly, and is a backbone of US energy use. There could well be short term further share price drops as the income investors (retail and institutional) shift out, which just means more buying opportunity. You have to have some faith in management, but Rich Kinder's track record is damn near impeccable. Read some of their reports and press releases -- they are crystal clear and make perfect sense. Do you trust GAAP one-size-fits all accounting on the depreciation schedule, or is it more accurate to trust management that has gotten it right for 15 years and knows their assets? I trust management over GAAP mandated rules for depreciation. They point out that much of the maintenance on individual pipelines is expensed out of earnings and so already paid for so to just blindly depreciate as GAAP mandates acts as double counting the true maintenance cap-ex. They just show you the more accurate picture and distribute cash accordingly. They are highly levered, granted -- perhaps a bit too close for comfort these days. But this is like a utility, not a flyer type of leverage. It would be a financial mistake to not leverage to a relatively high extent when the assets are so predictable here. In the biggest decline in oil and gas prices in a while, management has held up quite well and responds rationally to my mind. Delaware judgment? Headline reads $170 million, but in the article itself it says the judge holds them liable for 58% of that, so it's really $100 million, plus they are appealing (and have a decent shot at getting a reversal based solely on the dubious claim), have already reserved for this and consider it immaterial, and have insurance coverage. Non-event, made much of by shorts. What am I missing here? I think this is the best buy out there. Please post any contrary thoughts.

I am. I think it's been priced as if the Williams deal is bad for it, when it is a buyer of assets in the sector. I think the downturn in the sector generally makes it easier for them to hit the dividend growth targets for next several years.

Interest rates were also significantly higher in the 70's and early 80's. Interest rates are at the lowest levels today since the 1930's. Your alternatives to GIC's, treasuries and corporate debt is equities whose annual dividend yields are twice as high, while actual yield on investment is more than triple what fixed income would get. Very big difference than equities trading at 3-4 times earnings in the 70's, but interest rates were at 6-7% or higher. Cheers! But this is why I am so cautious now. Interest rates ar at historic lows, and central banks are printing money, undermining the currency and ultimately ensuring that folks will demand higher interest to buy our bonds, eventually (who knows when). So if interest rates will have to go up sometime, and it will be the bond market that starts the process, doesn't that mean that equities will be worth less when that happens, along with every other cash flow stream? After all, interest rates were one of the reasons stocks got to 3 and 4 times earnings in that period of the 70s and early 80s.

I've been meaning to post this question for a while. I am wondering if the CPI linked derivatives are the best protection against deflation risk, since the governments control the CPI numbers. I remember Prem at the annual meeting saying that Japan experienced 14% cumulative deflation over the past 15 years, as did the U.S. in the 1930s Depression. However, I have seen figures that Japan's CPI deflation was actually quite mild, and the U.S. In the 1930S was tied to the gold standard and so might not be a good model for what would happen in a fiat currency deleveraging. Isn't it more likely that we will have asset price deflation in certain classes, and currency devaluation in nominal terms? Bernanke was very approving of the 40% currency devaluation that Roosevelt's administration caused to occur in the 1933-1935 time frame. I believe he would love to do that here, and has been reading from his 2002 playbook straight down the line. Given this, would't we have both deflation and inflation in the sense of currency devaluation, which the CPI linked derivatives would not really defend against too well?

Then why would you fall for the pitfall of trying to time such an event? It's just silly and not very value like imo. Timing seems hot lately, both for individuals stocks and the macro situation, and I don't get it. What if Buffett is at the helm for another 5 years or longer and IV nearly doubles before the stock takes a hit from this event? It's just not a valid argument imo. If we do drop 10-20% because Buffett suddenly resigns then I'll just sell some common and start buying long dated calls because it would imply BRK is trading at 50-55c on the dollar based on my estimates. Look what Apple's stock did after Jobs' resignation. I bet plenty of people thought it would go down as well and the MOS and general quality of the company is a lot less than Berkshire's at the moment. The longer it takes for Buffett to resign, the smaller the eventual opportunity loss will be in terms of performance as Buffett's extremely rare qualities will have lesser effect each passing year. And if you did a poll on the board some months ago I bet at least 50% would have believed Buffett would never buy back shares. If he's there 5 more years and the stock doubles, then my already substantial position will do just. As for "silly", I guess I'm just darn lucky I don't have to answer to you as to whether I'm a "good" value investor. Funny how the world works out that way. Jeez.

I'm a buyer of BRK at these prices, in addition to what I already hold. However, it occurs to me that something like this might be a preparation for a soon to be announced reduction in Buffett's responsibilities at Berkshire. At this point, with Buffett's retirement at least partially priced in, a removal of that uncertainty might well help the price, but I would still bet on a further drop in price if and when he reduces his responsibilities. I guess I'm just mentally holding some cash in preparation for that further opportunity to up my BRKB holdings to what I consider the full holding. Of course, pretty much everyone on this board knows that a reduction in Buffett's managerial duties (as opposed to capital allocation duties) would be pretty much meaningless to the company except for symbolic.