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Oil & Gas Consolidation; Netflix & Disney Partnership; Federal Student Aid Changes

Motley Fool - Sat Dec 30, 2023

In this podcast, Motley Fool host Ricky Mulvey and analyst Nick Sciple discuss:

  • Occidental Petroleum's acquisition of private energy producer CrownRock.
  • Walt Disney licensing shows out of its walled garden.
  • Why Netflix can afford to be a buyer right now.
  • Alphabet's antitrust loss against Epic Games.

Motley Fool personal finance expert Robert Brokamp interviews Mark Kantrowitz, the author of How to Appeal for More College Financial Aid, about recent changes to the FAFSA.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Dec. 12, 2023.

Ricky Mulvey: Are you an entertainment company looking for cash? Netflix says you may be entitled to compensation. Motley Fool Money starts now. A little bit of news to get through and joining us to do that is Nick Sciple. Nick, good to see you.

Nick Sciple: Yeah. Great to be here with you Ricky.

Ricky Mulvey: 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 CrownRock, a private energy producer, for $12 billion. Break this down. Why does Occidental want to buy CrownRock?

Nick Sciple: Well, this continue as a wave of really consolidation in the oil and gas industry, particularly in the Permian Basin, the shale patch in the US over the past year. Lots of folks recognizing that they've maybe used some of their best drilling inventory, looking to secure inventory for the long term. Occidental is one of those companies. These assets that they're acquiring from CrownRock are complementary to its existing portfolio in the Permian Basin. Gives them access to additional inventory in a basin that's starting to reach maturity is going to make them one of the largest producers in the Permian. Also, CEO Vicki Hollub has said it's going to give them the ability to weather downturns in a more robust way because CrownRocks wells have a little bit lower decline rates than that from what you see in their core portfolio. So 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 transactions. So 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.

Ricky Mulvey: 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.

Nick Sciple: 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 CrownRock. Seeing where they sell off assets maybe tells you about the future of the business. Clearly, some attraction to the Permian Basin, maybe some other areas. The emphasize going forward.

Ricky Mulvey: Yeah, let's focus on the Permian Basin for a second. It's a massive oil fields 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.

Nick Sciple: I think it's a few things going on to, you mentioned the Permian Basin, the largest, most developed basin in the US. 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. US 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 years ago during the pandemic. Had a couple strong years. So 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 percent or so in the past several months, maybe that positions some of these sellers to be a little bit more willing to bid up. So a lot of things going on at once that I think make for a robust deal environment.

Ricky Mulvey: So 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 trading a little bit down on this news, so. So what do you think the disconnect here is between Mr. Buffett and Mr. Market?

Nick Sciple: 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 near term as I mentioned, we've really seen oil prices fall significantly over 20 percent 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, 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 a lot more robust long term, more attractive looking long term. I think that's what these acquirers are seeing.

Ricky Mulvey: 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?

Nick Sciple: 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 platform than it does on some of these other platforms. The analogy I keep thinking about with this is like 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, Nicholas Cage's movie. That's not a movie you would ever seek out to watch, but if it's on TV you might. 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 watched it in droves on Netflix. Netflix is profitable. They're actually able to pay up for some of this content, and folks actually watched it on their platform, whereas they might get lost in some other streaming platform. I think it's a sign of Netflix's strength and they've kind of won the streaming war.

Ricky Mulvey: 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 in 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 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?

Nick Sciple: 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 as Netflix doesn't have a legacy business to protect or legacy debt to support in the way that the Warner Brothers Discovery does. So Netflix's streaming business is profitable, gives them the ability to go buy up some of some of this content and these other companies frankly need it because of their financial situation.

Ricky Mulvey: Yeah, 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.

Nick Sciple: Yeah. I think the media business is an 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 has already made and already has an existing audience. 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. Part of that is because they have access to license content in a way they maybe didn't expect to have a few years ago when competition was more intense.

Ricky Mulvey: A lot of traveling coming up for the holidays. People ask you for stock rec, sometimes, I'm not going to do that. You got any Netflix recs as we get to traveling for the holidays?

Nick Sciple: Well, on the topic of long-running sitcoms that Netflix didn't produce, I like to just play the hits, Seinfeld's 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. Kept me glued to the couch for a few hours. Maybe check that one out as well if you're in cults and their craziness.

Ricky Mulvey: I asked you for a TV wreck and you had Seinfeld is number one and it is 2023 disciple. 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. It is 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 Fortnight. 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. You've also got a Bloomberg headlining saying, "This decision could upend the mobile app economy". Nick Sciple. What say you?

Nick Sciple: Well, certainly always worth paying attention to whenever Google loses an antitrust case, has been long debated whether those App Store fees, I think it's 15 percent 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. Certainly could mean that the money that Google and Apple are able to achieve from those app stores smaller in the future.

Ricky Mulvey: One of the crux of it seems to be that Epic wanted to make their own app store within Google, which technically Google allows, of course. Or the Epic complaint is essentially 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.

Nick Sciple: 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 than folks who sell via those app stores, that presumably would fall to the bottom line for a company like Match Group or Spotify or other it's out there in the market. So 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.

Ricky Mulvey: 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's taking this news?

Nick Sciple: Well, you recall Apple was able to prevail over App, 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, 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.

Ricky Mulvey: Nick Sciple, thank you for your time and your insight. I'll see you later this week. Looking forward to it.

Nick Sciple: Looking forward to seeing you in DC for Foolapalooza. It's been a long time. Excited to get back.

Ricky Mulvey: 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 podcast@fool.com That is podcasts with an S at Fool.com. We're also going to be recording a mail bag with Robert Brokamp and Alison Southwick next week. If you have personal finance questions for them, that's a great place to do it. Up next, Mark Kantrowitz is a nationally recognized expert on student financial aid, 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?

Robert Brokamp: The free application for Federal Student Aid, better known as the FAFSA, is usually available on October 1, 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, the new FAFSA, which supposedly will be available sometime on or before December 31st.

Mark Kantrowitz: 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. That's one big change. Another change is that it will become easier for students to qualify for the Pell Grant. 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 a six figure income had twice as many children in college at the same time. They're also getting rid of the small business exclusion. Small businesses will count as an asset and the family farm exclusion. Now, a more recent problem, FAFSA includes a whole bunch of different tables of numbers that are supposed to be adjusted for inflation. 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 US 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 hunt on it for this year. But that means that the typical student is going to qualify for thousands of dollars less financial aid then they're entitled to. I don't think that's right.

Robert Brokamp: 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?

Mark Kantrowitz: 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 to 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. That pushes the schedule for getting financial aid award offers to the students back significantly. 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, who knows what 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.

Robert Brokamp: Wow. People, be prepared to be patient and maybe be delayed on getting your aid package.

Mark Kantrowitz: Yes.

Robert Brokamp: Let's talk about a couple other changes that I believe are coming. One is the change in the way the FAFSA handles divorced parents. What's going to be different about.

Mark Kantrowitz: 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, 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, 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.

Robert Brokamp: Another change is grandparents owned 529, a lot of grandparents, they opened 529 for their grand-kids in the past form the assets were not included on the FAFSA but distributions from those 529 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 529.

Mark Kantrowitz: 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 on 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 a custodial five to nine plans that are owned by the student or the five to nine 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 five to nine plan, not just for the student but for the student's siblings, the five to nine plans for the student's siblings are not going to be reported on the FAFSA so that will yield an improvement. So you're not counting your brother or sisters as five to nine plan against your aid eligibility. So there's a couple of changes here and the change in the treatment of 5-9 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 5-9 plans disappear. They aren't reported as an asset and distribution. 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 5-9 plans the way they were intended if it's owned by a grandparent, it has no impact.

Robert Brokamp: So putting it all together who's going to benefit the most from these changes and who's eligibility for aid is actually going to be reduced due to these changes?

Mark Kantrowitz: 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 other poverty line. So if your parent's 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 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 1.5 million of them will qualify for the maximum Pell Grant. 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. 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. They won't qualify many of them for the Pell Grant. Now the change with regard to grandparent-owned 5-9 plans, that's going to be a benefit, especially when the grandparents are wealthy but the family is not, it's hard to predict any individual have a generality that says, oh, all these students are not going to get more aid or 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 get less financial aid.

Robert Brokamp: It definitely seems to me like if you have kids in college, like I do now, I have three kids in college. You pay a certain amount this year based on how you filled out the face. 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.

Mark Kantrowitz: Yes, definitely. 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 name index, which is the 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 adjustments. But the colleges are concerned about the potential shock to the family finances from if they have like three kids in college at the same time. And each of them gets $3,000 less financial aid, 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.

Ricky Mulvey: 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. Don't buy yourself anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Nick Sciple has positions in Match Group. Ricky Mulvey has positions in Netflix, Spotify Technology, and Walt Disney. Robert Brokamp, CFP(R) has positions in Walt Disney. The Motley Fool has positions in and recommends Alphabet, Apple, Match Group, Netflix, Spotify Technology, Walt Disney, and Warner Bros. Discovery. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.

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