Motley Fool Hidden Gems Investing - Netflix Has Cash

Episode Date: December 12, 2023

If you’re an entertainment company in need of some money, then Netflix would like a word. (00:14) Ricky Mulvey and Nick Sciple discuss: - Occidental Petroleum’s acquisition of private energy producer, CrownRock. - Disney licensing shows out of its walled garden. - Why Netflix is can afford to be a buyer right now. - Google’s antitrust loss against Epic Games. Plus, (13:58) Robert Brokamp interviews Mark Kantrowitz the author of “How to Appeal for More College Financial Aid” about the recent changes to the FAFSA. Stocks discussed: OXY, XOM, NFLX, DIS, WBD, GOOG, GOOGL, AAPL Hosts: Ricky Mulvey, Robert Brokamp Guests: Nick Sciple, Mark Kantrowitz Engineers: Tim Sparks, Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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us to do that is nick seipel nick good to see you yeah great to be here with you ricky you know deidre likes doing m&a mondays but we got another pretty major acquisition going on to start us off on Tuesday. Occidental Petroleum, which engages in the exploration and production of oil and natural gas, has agreed to buy Crown Rock, a private energy producer, for $12 billion. Break this down. Why does Occidental want to buy Crown Rock? Well, this continues a wave of really consolidation in the oil and gas industry, particularly in the Permian Basin, the shale patch in the U.S. over the past year. Lots of folks recognizing that they've maybe used some of their best drilling inventory,

looking to secure inventory over for the long-term. Occidental is one of those companies. These assets that they're acquiring from Crown Rock are complementary to its existing portfolio in the Permian Basin. It gives them access to additional inventory in a basin that's starting to reach maturity. It's going to make them one of the largest producers in the Permian. Also, CEO Vicky Holub has said it's going to give them the ability to weather downturns in a more robust way because Crown Rock's wells have a little bit lower decline rates than that from what you see in their core portfolio, to position them to be able to withstand a little bit different environments. Also worth noting here, looking at Occidental, the way they're

structuring this deal, using $10 billion in debt, a lot more aggressive than some of the other deals you've seen out there in the market. For example, Exxon went out there and bought Pioneer, used all stock in its transaction. It continues the trend we've seen in the industry, but maybe a little bit more aggressive, which isn't out of the ordinary for Occidental, if you remember back to their acquisition of Anadarko just a few years ago. Yeah, there's a little bit of oddness with the deal where they're taking out a lot of debt to do it. They're also simultaneously boosting their dividend and selling off other assets, which I think has raised some question marks among investors.

Yeah, it'll be interesting to see what happens with those divestments. I think the number was $4.5 to $6 billion in divestments, which they'll use to pay down some of that debt they're taking on to acquire Crown Rock. Seeing where they sell off assets maybe tells you about the future of the business. There's clearly some attraction to the Permian Basin, maybe some other areas de-emphasized going forward. Let's focus on the Permian Basin for a second. It's a massive oil field, primarily in West Texas. I think it goes out to New Mexico a little bit. ExxonMobil, purchasing Pioneer Natural Resources to get a little

bit more of a stake in that ground. Talk about the area. Why is there such a rush for producers to get space in this area? It's been well known for a while that there's a lot of oil in Texas, specifically in the Permian Basin. Yeah, I think it's a few things going on. You mentioned the Permian Basin, the largest, most developed basin in the U.S., among the lowest breakevens on the market, makes it attractive for that reason. Also, as I mentioned earlier, some of the best acreage in the Permian Basin has been drilled. We're at the point where the basin is maturing. U.S. oil production is at all-time highs, but it's really only getting back to where we were in 2019. As some of these larger producers are looking to

secure inventory for the long-term, that makes the Permian attractive. Also, these folks have a lot of cash compared to where they were a couple of years ago during the pandemic, had a couple of strong years. You have some strong balance sheets, a position to go gobble up some of these assets. At the same time, oil prices are down 20% or so in the past several months, maybe that positions some of these sellers to be a little bit more willing to bid up. A lot of things going on at once that I think make for a robust deal environment. Warren Buffett has a large stake in Occidental Petroleum. He seems to have blessed this deal. There was a private jet visiting Omaha that captured some market commentators' attention. The broader market is a little

bit more skeptical. I think Occidental is trading a little bit down on this news. What do you think the disconnect here is between Mr. Buffett and Mr. Market? Yeah, I think it's really this divergence you see in the markets in general, this divergence between what's going on in the near term and then expectations for the long term. In the term, as I mentioned, we've really seen oil prices fall significantly over 20% in the past several months, concerns about weak demand in China, concerns that maybe these OPEC cuts that we've seen won't be as sticky as the market hopes. But long-term, these inventory dynamics I talked about in the Permian continue to play out as we've used some of the best rockets. In order to maintain

these levels of production that we're seeing today, you're going to need to see some of this consolidation take place. I think near-term, some skepticism about oil prices. I think the supply demand picture is a lot more robust long-term, more attractive-looking long-term, and I think that's what these acquirers are seeing. Friends become enemies, enemies become friends. Let's move on to the next story. Disney and Netflix have agreed to a short-term domestic content agreement. Netflix is going to get to stream 14 library shows on a non-exclusive basis. Those include Grey's Anatomy, This Is Us, and ESPN's 30 for 30 library. Nick, this is a big deal, but what is the signal to you? Yeah, I think this continues a trend of lots of

folks in the entertainment landscape that had positioned themselves to maybe compete directly with Netflix now saying, we can't compete with Netflix in the way that we had hoped. Challenges to Disney's maybe core cable business makes licensing this content to Netflix a little bit more attractive. You've seen that from other folks out there in the industry as well. When I think about, this isn't the best Disney content out there. They're not putting Star Wars and Marvel. They're putting Grey's Anatomy and 30 for 30. But I think that this content is more, I guess, punches above its weight on Netflix's platform than it does on some of these other platforms. The analogy I keep thinking about with this is, Netflix is like TV. Do you ever remember

back in the days of cable when there'd be some movie on TV, like the classic Con Air, right? Nicolas Cage's movie. That's not a movie you would ever seek out to watch, but if it's on TV, you might. And I think Netflix is in that dynamic as well, where I don't think a lot of folks sought out Suits when it was on other streaming platforms, but they watch it in droves on Netflix. So Netflix is profitable. They're actually able to pay up for some of this content and folks actually watch it on their platform, whereas they might get lost in some other streaming platforms. So I think it's a sign of Netflix's strength and they've won the streaming more. Unlike some other companies, Disney has been very careful to say the core properties

are not going there. I think it's to your point, it's a win for both companies because Disney gets to say, hey, we're not going to give you the Marvel, Pixar, Star Wars stuff. And Netflix, honestly, maybe they don't care because it's the shows that you can have on the background, maybe an ESPN 30 for 30 that you've watched a few other times. Back in June, Netflix made a licensing deal with Warner Brothers Discovery. It was about six months after David Zaslav asked his team to shut down deals between them and Netflix because he didn't like it. It was like some certain deal that they had with the show Sandman. Now, that's why you're seeing DC movies on Netflix as well as some HBO series on there. How did Netflix get into this

position of strength? Why is Netflix in a position to be a buyer right now? Well, I think Netflix is profitable in streaming in a way that many of these other folks aren't. They've been able to achieve scale and cash flow that other folks aren't able to achieve in streaming. Another thing that I think is worth noting as well is, Netflix doesn't have a legacy business to protect or legacy debt to support in the way that Warner Brothers Discovery does. Netflix's streaming business is profitable, gives them the ability to go buy up some of this content, and these other companies, frankly, need it because of their financial situation. For Netflix, one thing I found

interesting about them, and I think this deal shows it, is they spend a ton of money buying these long-running sitcoms, and they've had very little success making them. They're happy to spend so much money on, for a while it was The Office, now it's going to be Grey's Anatomy and This Is Us. They don't make the stuff that they spend lots of money buying, they'd rather pay for the hits. Yeah. I think the media business is inherently an uncertain one when you're making content that does not yet have an audience out there, it's a lot easier to do that calculus for licensed content that has an existing audience in place. I think if I am Netflix and I have the ability to pay a reasonable

price for this content that is already made and already has an existing audience with it, I think that's a lot more attractive bet than trying to come up with a new property from zero. I think even Netflix's management has said they're going to slow down a little bit on original production, and part of that is because they have access to licensed content way they maybe didn't expect to have a few years ago when competition was more intense. A lot of traveling coming up for the holidays. People ask you for stock wrecks. Sometimes I'm not going to do that. Have you got any Netflix wrecks as we get to traveling for the holidays? Well, on the topic of long-running

sitcoms that Netflix didn't produce, I like to just play the hits. Seinfeld is on Netflix these days. I spend a lot of time watching that. That's one for me. If you want something new, I'm into the cult shows, escaping twin flames. It kept me glued to the couch for a few hours. So, you know, maybe check that one out as well if you're into cults and their craziness. I asked you for a TV rec and you had Seinfeld as number one. And it is 2023, Nick Seipel. That's right. I'll throw out, if you like the docu-series, there's one that's excellent.

Well, there's one I'm going to recommend after we record, but I don't want to recommend it on a wide scale basis. Merpeople is phenomenal. It is the subculture of people who are mermaids. It is a three-part documentary series. Honestly, it is one of the strongest stories that has hooked me in where a mermaid in Arkansas has to go on the hero's journey so she can live out her dream. Shout out Sparkles as we move to our next story. Alphabet versus Epic.

The video game maker Epic seems to have a major win. They're known for making Fortnite. A jury in Northern California said that Google basically has monopoly power over the Android app market. Google did anti-competitive things. And moreover, Epic was hurt by those practices. Google shareholders really don't seem to mind. And you've also got a Bloomberg headlining saying, quote, this decision could upend the mobile app economy, end quote. Nick Seipel, what say you?

Well, certainly always worth paying attention to whenever Google loses an antitrust case. It's been long debated whether those app store fees, I think it's 15% on the baseline that Google and Apple charge aren't monopoly profits. We finally have a jury that has made that ruling. Now, are we going to upend the mobile app economy? We'll see. The court still needs to determine the appropriate remedies to take. They're going to hold a hearing in January to decide what steps to take to fix this anti-competitive industry. But whatever choices that court makes could lead the way we go about buying apps and consuming them different in the future than it has been today,

and certainly could mean that the money that Google and Apple are able to achieve from those app stores is smaller in the future. One of the cruxes of it seems to be that Epic wanted to make their own app store within Google, which technically Google allows. Of course, the Epic complaint is essentially they put up this warning screen, like if you download this app store, you're opening yourself up to all these viruses, that sort of thing. And that may have been anti-competitive. But what do you think the implications are if software developers can go on these platforms, Google and Apple, and make their own app stores? I would say this outcome seems unlikely, but not impossible.

Yeah. It certainly would be gravity for the amount of fees that Google and Apple are able to charge for folks to transact through the App Store. It would be in the interest of consumers to save a little bit of money by doing things that way. I think to the extent you see those royalties fall for Google and Apple, then folks who sell via those App Stores, that presumably would fall to the bottom line for a company like Match Group or Spotify or others out there in the market. So, you know, a shrinking profit pool for some of these big companies could open up additional profits for other businesses. You think about a company like Valve with Steam. Steam is really a dominant app purchase platform. And you think about

games online, could all of a sudden Steam compete more directly with Google and Apple when it comes to the games ecosystem? Something like that could be interesting. We're not the only ones watching this story. I'm sure the C-suite of Apple has checked out the headline this morning. How do you think Apple is taking this news? Well, you recall Apple was able to prevail over Epic, at least a judge was able to rule in their favor, didn't get to a jury trial. To the extent this ruling sticks, again, this is a meaningful threat to Apple's App Store, which gives them an advantage over others in the Apple ecosystem. So, I think if I'm Apple, I would be worried, but we'll see what the court does next,

what remedies they choose, how much that will impact the future for Apple. Nick Seifel, thank you for your time and your insight. I'll see you later this week. Looking forward to it. Yeah, looking forward to seeing you in D.C. for Foolapalooza. It's been a long time. Excited to get back. We're coming up on the end of the year, and one thing we get is a lot of people trying

to improve their financial situation as they begin the new year. So if you've listened to the show, you found value in it, and you listen on Apple Podcasts, please leave us a five-star review and maybe a couple sentences in your review. about your time listening to the show. We really appreciate it and it helps us out. If you have comments, questions, or suggestions for the show, a great place to do that is our email. It is podcasts at fool.com.

That is podcasts with an S at fool.com. We're also going to be recording a mailbag with Robert Brokamp and Alison Southwick next week if you have personal finance questions for them. You just found out that your sales team is at risk of missing quota. Don't panic, just ask Rippling AI. Since it's built on your real-time people and business data,

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scholarships, and college savings plans. He's also the author of five books, including How to Appeal for More College Financial Aid. Robert Brokamp spoke with Kantrowitz about recent changes to the financial application process, who's going to get more aid, and who will end up actually paying more. The free application for federal student aid, better known as the FAFSA, is usually available on October 1st, but it's been delayed this year while the Department of Education makes significant changes to the form and how aid is determined. So, Mark, what are some of the biggest differences between the old FAFSA and the new FAFSA, which

supposedly will be available sometime on or before December 31st? Well, the new FAFSA is much shorter and simpler than the old FAFSA. They got rid of about two-thirds of the questions. Can't say the exact number because a lot depends on the particular circumstances of the student and their family. But on average, we're going to see one-third as many questions, which means instead of taking an hour, it might take 15, 20 minutes for people to complete the form. So that's one big change. Another change is that it will become easier for students to qualify for the Pell Grant. So there will be more financial aid for low-income students, but there are several changes that make it harder for middle and high-income students to qualify for aid. For example, they get rid of the sibling loophole, which divided the parent contribution

by the number of children in college. So a parent who had $100,000 of income was approximately the same as a parent who has $50,000 in income if the parent with the six-figure income had twice as many children in college at the same time. They're also getting rid of the small business exclusion. So small businesses will count as an asset. And the family farm exclusion. Now, a more recent problem is the FAFSA includes a whole bunch of different tables of numbers that are supposed to be adjusted for inflation. So an example is the Income Protection Allowance shelters a portion of the family income. There's also an Income Protection Allowance for the student income. the U.S. Department of Education is not doing that inflation adjustment, even though it's required by

law this year. They will do it for the 2025-26 FAFSA, but they're saying that the timeline is too tight and it's too complicated for them to do right now, so they'll need to punt on it for this year. But that means that the typical student is going to qualify for thousands of dollars less financial aid than they're entitled to. And I don't think that's right. Yeah, I saw you quoted in a CNBC article about this. Do you think this is something that if there's enough of an uproar about it that they will change, or is it really just too late? Well, it may be too late because they're already seem to be running right up against the deadline. So the due date for the FAFSA, as you noted, is going to be December 31st instead of October 1st.

That's not that big a deal. And if you go back eight years, the FAFSA had a start date of January 1st. it wasn't ideal, but the switch to October 1st was an improvement. But it's not just that students will only be able to start submitting the FAFSA on December 31st. It's also the colleges are not going to get a copy of the students' FAFSA information until late January. And that pushes the schedule for getting financial aid award offers to the students back significantly. So, I wouldn't be surprised if college financial aid offers are made in late March or early April as opposed to early March because of this, if the colleges squeeze the schedule

as much as they can. And who knows what kind of problems there may be with this FAFSA. There hasn't been any public beta testing of it, so there could be a lot of glitches when it first launches wow all right so people be prepared to for uh to be patient and maybe be delayed on getting your aid package yes let's talk about a couple other changes that i i believe are coming um one is the change in the way the fafsa handles divorced parents what's going to be different about that? Right. So when the parents are divorced or separated or never married, if they live together, they're treated as though they're married. But if they live apart,

then only one parent is responsible for completing the FAFSA. This used to be the parent with whom the child lived the most. But starting with the 2024-25 FAFSA, it'll be the parent who provided the most financial support to the student in the 12 months ending on the date the FAFSA is filed. Now, if the parents provide an equal amount of financial support, then it'll be whichever parent has a greater income, counting the income of any step-parents. So, that gives the parents an incentive to make sure that it's a parent with a lower income who provides more support so that the student will qualify for more financial aid. Another change is grandparent-owned 529s. A lot of grandparents, they open 529s

for their grandkids. In the past form, the assets were not included on the FAFSA, but distributions from those 529s were counted as untaxed income. But as I understand it, that's going away so that it's almost like the FAFSA doesn't know anything about any grandparent 529s? Right. So there used to be a question on the FAFSA called the cash support question, which is where you would report untaxed income to the student. There was no similar question for parents. That question has been eliminated. And that's where you would report distributions from grandparent-owned 529 plans and also gifts to the student from grandparents, aunts and uncles. And it's not just grandparents. It's anybody other than the student or the

student's custodial parent. So, the treatment for custodial 529 plans that are owned by the student or the 529 plan that is owned by a dependent student's parent, that hasn't changed. those are still reported as parent assets on the FAFSA. There is one slight change which is if the parent owns a 529 plan not just for the student but for the student siblings the 529 plans for the student siblings are not going to be reported on the FAFSA so that will yield an improvement so you're not counting your brother or sister's 529 plan against your aid eligibility. So there's a couple changes here. And the change in the treatment of 529 plans owned by the grandparent, aunts, uncles, or anybody other than the student or parent, that is a significant positive change

in that it makes those 529 plans disappear. They aren't reported as an asset and distributions, qualified distributions, aren't counted as untaxed income on the FAFSA. Now, if you make a non-qualified distribution that is going to show up in your adjusted gross income and that will affect your financial aid eligibility. But so long as you use the 529 plans the way they were intended, if it's owned by a grandparent, it has no impact. So putting it all together, I mean, who's going to benefit the most from these changes and whose eligibility for aid is actually going to be reduced due to these changes? Well, there are a bunch of cross currents. So generally, low-income students will get more aid. The Pell Grant formula has a new secondary formula on top

of the existing formula. The secondary formula compares the family income to two thresholds based on a multiple of the poverty line. So if your parent income is less than 175% of the poverty line, you're going to get the maximum Pell Grant regardless of what the primary formula says. And if the income is less than another threshold, which depends on whether you're a single-parent household or a two-parent household, but if you are under that threshold, you're going to get at least a minimum Pell Grant. These changes mean that more than 500,000 additional students will qualify for a Pell Grant. And of all the students who qualify for a Pell Grant, an additional one and a half million of them will qualify for the maximum Pell Grant. So there will be more grant

money being awarded to low-income students. More of them are going to qualify and more of them are going to get the maximum grant. So that means low-income students are generally going to benefit significantly from the new form. Middle and high-income families may have a decrease in their aid eligibility. It used to be that families with six-figure incomes could nevertheless qualify for a Pell Grant if they had multiple children in college at the same time. That's no longer going to be there, so they won't qualify, many of them, for the Pell Grant. Now, the change with regard to grandparent-owned 529 plans, that's going to be a benefit, especially when the grandparents are wealthy but the family is not. So, it's hard to predict any individual and have

a generality that says, oh, all these students are not going to get more aid or going to get less aid and these aren't. But we have these general trends. Low-income students get more financial aid, middle and high-income students may get less financial aid. It definitely seems to me like if you have kids in college, like I do now, I have three kids in college, and you pay a certain amount this year based on how you filled out the FAFSA, there could be a significant difference for next year if you have multiple kids or if you own that farm or if you own that business. Yes, definitely.

And there's going to be the possibility that you may get not necessarily from the federal government or the state government, but maybe from the colleges themselves, you will get less financial aid because of that change in the Student Aid Index, which is a new name for the EFC. Now, I would recommend appealing to the college, point out that last year you got a certain amount of financial aid, and this year you're getting much less, even though your income hasn't changed. Now, what I think some colleges may do is try to hold the family harmless if you're a returning student. If you're a brand new student, you might not get any adjustment, but the colleges are concerned about the potential shock to the family finances from having, I mean, if they have like three kids in college at the same time and each of them gets $3,000 less financial aid, I mean, that's perhaps as much as $10,000 less aid. And it'll vary significantly from one family to the next in terms of the impact, that may make it very difficult for the family to afford that college

education. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow. Thank you.