Oil and Gas Property Management, Inc. is one of the several companies that Warren Buffett profiled in the Commercial and Financial Chronicle’s The Security I Like Best column in the late 1950s.
Warren Buffett's Favourite Oil And Gas Company
Oil and Gas Property was organized to “manage producing oil and gas properties” by buying up these properties subject to substantial oil payments. According to Buffett, a large proportion of income from producing assets was used “in the early years to extinguish these payments.” He goes on to compare this method to "real estate purchase subject to large mortgages with rental income, exclusive of that portion needed for operating expenses, utilized for mortgage reduction.”
The one problem with this approach is that gross income tends to be very small, although equity on the balance sheet is building rapidly. As Buffett puts it:
"Accounting-wise, the result is to show a very small gross income while the Equity is being built up substantially. accordingly, the financial services do not show accurately the operating picture of O & G, and the interested reader should study the annual report of the company."
This less than transparent accounting scared investors away from O&G and as a result, the stock was dirt cheap:
"The 380000 shares of common have a total market value of about $5 million which makes the arithmetic of the picture fascinating. An increase in the price of oil at 15 cents per barrel or one cent per MCF in the case of gas is equal to the entire market value of the common. If oil over the next few years were to increase in price 50 cents per barrel, the gain in value would be equal to almost 400% of the current total market price of the common."
Launched with only $10 million of capital, at the time Buffett covered the company, O&G Had a market value of only $5 million, $65 million of payment obligations on oil properties acquired ($49 million of oil payments and $17 million of loans and debentures), and a gross value of oil and gas in these assets of $150 million. Considering this seemingly obvious value, Buffett concluded that a “small investment in O&G should do the job that a many times larger investment in a non leveraged oil holding would do while exposing the holder to a much smaller maximum loss.”
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