May 9 (Bloomberg) — Warren Buffett’s Berkshire Hathaway Inc. posted its worst loss in at least two decades as the billionaire chairman worked to recover from a “major mistake” of buying ConocoPhillips shares with oil prices near their peak.
The first-quarter net loss of $1.53 billion, or $990 a share, compares with profit of $940 million, or $607, in the same period a year earlier, the Omaha, Nebraska-based firm said yesterday in a statement. Writedowns on derivatives tied to corporate-debt indexes cost the company about $1.3 billion and Berkshire took a $1.9 billion charge on oil producer ConocoPhillips, contributing to its first net loss since 2001.
Berkshire is cutting the ConocoPhillips stake to gain a tax advantage less than a year after becoming the Houston-based firm’s largest shareholder, the company said in the statement. Buffett wrote in his annual letter to shareholders in February that buying the stock while oil was near $140 a barrel cost his firm “several billion dollars.” ConocoPhillips has fallen by half since June.
“Warren Buffett isn’t perfect,” said Michael Yoshikami, chief investment strategist at Walnut Creek, California-based YCMNet Advisors. “He’s trying to get some benefit out of that mistake, and he’s diversified enough that he can recover those losses somewhere else.”
Berkshire sold 13.7 million shares of ConocoPhillips in the first three months of the year, reducing the holding to 71.2 million shares, and divested an undisclosed number since March 31, the statement said. Berkshire said that it could recover as much as $690 million in federal taxes on capital gains from 2006 by selling investments at a loss this year.
Book value, a measure of assets minus liabilities, fell 5.9 percent in three months to $102.8 billion on declines in the equity portfolio and derivatives. Berkshire’s liability on derivatives at the finance and financial products operations widened to $15.4 billion as of March 31 from $14.6 billion three months earlier, the company said in a regulatory filing.
The derivatives have weighed on Berkshire results for more than a year. Berkshire’s commitments, which cover possible losses on corporate debt, stock indexes and municipal bonds, prompted Fitch Ratings and Moody’s Investors Service to strip the firm of its top-level credit ratings this year.
Berkshire paid $675 million in the quarter to investors who bet on defaults by companies in undisclosed high-yield bond indexes and an additional $450 million since, the statement said. Until this year, the company had paid $542 million. Berkshire collected $3.4 billion in premiums on the contracts as of Dec. 31.
The declines in Buffett’s equity-linked derivative portfolio are paper losses, and wouldn’t require payments until at least 2019.
“The odds are extremely good” that the contracts tied to stock markets will be profitable in the long term, Buffett, 78, told shareholders at the company’s annual meeting May 2. He said he wasn’t as confident on the swaps tied to corporate debt.
“Several issuers included in the various high-yield indices filed for bankruptcy during the quarter,” Berkshire said in yesterday’s statement.
Buffett told shareholders in his annual letter in February that the ConocoPhillips investment was a “major mistake.”
“I in no way anticipated the dramatic fall in energy prices that occurred,” said Buffett, writing that he still expects an increase over time. “But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.”
Buffett has said the economic slump depressed revenue at the company’s jewelry businesses and operations tied to housing markets. Berkshire last year cut jobs at units including Clayton Homes Inc., which builds manufactured housing, and brickmaker Acme Building Brands. Profit at furniture stores, jewelry shops and its candy business fell by half in the first quarter to $16 million.
Earnings from Berkshire’s MidAmerican Energy Holdings Co. unit, which includes gas pipelines and Portland, Oregon-based PacifiCorp, decreased 36 percent to $203 million after taxes.
Berkshire, which owns National Indemnity Co., General Re Corp. and Geico Corp., said profit from underwriting insurance policies rose 21 percent to $219 million. Pretax profit from selling policies at car insurer Geico slipped 20 percent to $148 million before taxes. The unit added 430,000 policyholders in the quarter as customers increased deductibles and scaled back coverage to save money, the company said.
Berkshire shares have fallen about 1.4 percent this year, after a 32 percent in decline in 2008. Eleven of the top 12 stocks in Berkshire’s U.S. portfolio declined in the first quarter. Coca-Cola Co., Berkshire’s top holding, dropped 2.9 percent. Wells Fargo & Co., the next largest, plunged 52 percent.
Stocks in Berkshire’s portfolio gained about $5 billion in market value from the end of the quarter through May 7, the company said in yesterday’s filing.
Berkshire, which posted five straight declines in quarterly profit through the end of 2008, last posted a loss in the three months ended Sept. 30, 2001, on claims tied to terrorist attacks. It was the only other quarterly loss since 1986, according to data provided by Standard & Poor’s.
To contact the reporter on this story: Erik Holm in New York at email@example.com.
Last Updated: May 9, 2009 00:01 EDT
By Erik Holm