Warren Buffett Just Bought Another Million Shares of This Company

Every quarter, large money-managers have to disclose what they've bought and sold via "13F" filings. While Fools don't always (or even usually) follow what the big money does, we can often glean an idea or two by tracing their footsteps.

Berkshire Hathaway CEO Warren Buffett made big news last year when he invested more than $3 billion in the biggest name in Big Oil -- ExxonMobil (NYSE: XOM  ) -- to the tune of more than 40 million shares. Berkshire's latest 13F shows that Buffett (or was it Berkshire portfolio manager Ted Weschler or Todd Combs?) added another million shares in the fourth quarter. 

Why is Berkshire investing so much capital in one of the largest publicly traded companies in the world? After all, Buffett even chided himself for making the mistake of investing big in ConocoPhillips (NYSE: COP  ) in similar circumstances back in 2008, with oil prices and the stock market both near all-time highs; what makes this different? Let's take a closer look.

What a difference a year makes
Twelve months ago, Berkshire held zero shares of Exxonmobil. Phillips 66  (NYSE: PSX  ) and ConocoPhillips -- at about $1.4 billion each -- were Berkshire's largest energy holdings. After last year's spending spree, ExxonMobil now stands as Berkshires sixth-largest stock position, in a statistical tie with long-held Procter and Gamble as 4% of Berkshire's stock portfolio. 

During the same period, Buffett largely sold out of ConocoPhillips, with Berkshire now holding 11 million shares versus more than 80 million held in 2008. Most of the remaining stake in Phillips 66 -- largely received when the company was spun out of ConocoPhillips in 2012 -- will also disappear from Berkshire's portfolio this year, when they're traded back to Phillips 66 in exchange for the company's flow enhancer business. 

Beyond Exxonmobil and ConocoPhillips

Gas prices in 1938, Santa Fe, NM. Source: Library of Congress

ConocoPhillips' 2012 decision to essentially split the company in half, with the midstream and refining business becoming Phillips 66, while the exploration and production business remained ConocoPhillips, likely played some role in Buffett's decision to sell shares of ConocoPhillips and invest in the fully integrated ExxonMobil. But to stop there ignores a larger data point with Berkshire's portfolio: Total energy company holdings one year ago were less than $3.5 billion total. This year? 

Try $8.2 billion, a 134% increase from last year's investments in energy. 

NOV has little competition in many of its business units, such as Rollington. Source: NOV

Even after the Phillips 66 deal closes, we're talking about double the amount invested in energy companies from just one year ago. In addition to ExxonMobil, Berkshire invested in oilfield services provider National Oilwell Varco, and Canada's largest integrated energy company, Suncor, in 2013. The reality is, this isn't 2008 redux: It's not likely that a looming housing market implosion is poised to rip the underpinnings of the global economy loose, send millions to the unemployment line, and oil prices down by 70%. To the contrary, all indications are that the slow -- yet steady -- recovery will continue, and this will lift the energy sector higher on increased demand. 

Betting big on big energy, but still the Buffett way
Besides being in the oil business, all three of the companies above share attributes that Buffett is known to find desirable: 

  • Strong competitive advantages
  • Dominant market positions
  • Rock-solid balance sheets
  • Managements that are diligent about conservative capital allocation

Without trying to read Buffett's mind -- after all, we should own our investing decisions and not blindly follow anyone -- ExxonMobil has a number of qualities that make it attractive.

Even as energy companies like Berkshire's MidAmerican add solar and wind, it won't bridge the growth in demand in coming years. Source: SunPower

Even with the advancements in capabilities like horizontal drilling and hydraulic fracturing, as well as offshore drillships increasingly capable of getting to reserves located miles beneath the ocean, there are finite oil and gas resources. Demand, however, is continuing to grow as the planet's population increases. According to the IEA, the planet's population will increase by one billion residents by 2035, with the majority of this new population in the middle-class -- meaning even more demand for cheap energy. The sad reality is that renewables alone just won't meet the growth in demand, meaning the best capitalized, best managed oil companies -- including a behemoth like ExxonMobil -- stand to reward shareholders for years to come. 

Final thoughts: Know thyself, know thy portfolio
Buffett may be a genius, but he's not managing your portfolio -- he's managing Berkshire's.

ExxonMobil's 2.6% dividend, which has been increased every year for decades -- except for one quarter in 2001 -- is nice. The stock buyback program has reduced shares outstanding by 37% since the 1999 merger between Exxon and Mobil -- even when factoring in the $31 billion in stock used to buy XTO Energy in 2010, so even if the company doesn't grow much larger, its per share value is likely to outperform the market. Simply put, ExxonMobil's management has a relentless focus on maximizing returns, and operates in an industry that's going to see increased demand in coming years. Combined, these make ExxonMobil a compelling and attractive company to own. 

Should you own shares? That's up to you to decide.

Looking for more investing lessons from Buffett?
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Read/Post Comments (9) | Recommend This Article (34)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 25, 2014, at 1:17 PM, GaryDMN wrote:

    Its the anti-Al Gore plan. Al Gore came out a couple months ago and said oil investments are dead money. Warren Buffets way of thanking him, is to buy oil companies, as Gore friendly investors sell. Brilliant move Warren. Oil is far from dead and the majority of all oil used today is being consumer by less than a dozen countries. That will change, developing countries, will develop and require more fuel, not just oil, but every form of energy. The world no longer revolves around the USA and gold is a great example. Most consumer gold demand is coming from Asia, with China and India being the largest importers in the world now. China is desperately trying to move from coal power to natural gas and nuclear energy, to avoid the air pollution problems they are facing now. The Chinese are buying more cars, motorcycles, trains, planes and trucks than ever before and in many cases, more than any other country. This is the tip of the iceberg, the rest of the world is consuming more fuel every year. Oil is not going away, in fact its a growth industry.

  • Report this Comment On February 25, 2014, at 7:57 PM, tungpham15 wrote:

    You said: "Why is Berkshire investing so much capital in one of the largest publicly traded companies in the world?"

    The answer is quite simple. XOM reached the bottom on 2/3 - 2/7 per weekly chart of XOM, and was ready to rebound the week after.

    Warren Buffett is simply a good chartist. Why bother to buy many stocks when you know exactly a specific stock will surely go up next week? People buy a bunch of stocks because they are not sure which one will go up and which one will go down. That's all.

    Tung Pham

  • Report this Comment On February 25, 2014, at 9:55 PM, stockdissector wrote:

    Hey!

    Great article!

  • Report this Comment On February 27, 2014, at 6:23 PM, TMFVelvetHammer wrote:

    Thanks Bill!

  • Report this Comment On February 28, 2014, at 9:40 AM, PEStudent wrote:

    Nice article about Exxon, but I'm not so sure Conoco Phillips is dead in the water. I own shares in both, about 3x as much value in Exxon, but expect to close that up by slowly adding to the no-purchase-fee Conoco DRIP.

    Exxon is the giant in the sector and has a durable competitive advantage in refinery efficiency. It has also built reserves by focusing on liquids so that it now has a majority of more-lucrative liquid over gaseous reserves, though its total reserves fell for the first time in 18 years in 2013. But Conoco also has a bit of a moat in terms of proven large reserves, strongly liquid, that are highly exploitable.

    Conoco Phillips is now basically an exploration company with four recent deepwater finds in the Gulf of Mexico and aggressive activity elsewhere. It has a P/E of 8.98. t pays a sustainable 4.2% dividend (48% payout ratio) while earnings/sh. grew at a 9.6% annual rate for the past 5 years and is expected to grow (Yahoo's survey or analysts) at 5.1%/yr for the next five years.

    Compare that with Exxon's P/E of 13, 2.6% dividend (34% payout ratio), and an expected eps growth rate of 3.6% per year for the next five years.

  • Report this Comment On March 07, 2014, at 2:20 PM, Haggy wrote:

    I don't think this has much to do with Al Gore. Our dependence on oil keeps prices high. It's a limited resource and something needs to be done in the long run to wean our dependence. That's not to say that the industry will collapse in the short run, or even in Buffet's life or my lifetime.

    I remember when people said the same about tobacco. The industry would never lose a lawsuit and people would keep smoking. The lack of advertising wouldn't hurt and even the knowledge that it's bad for health wouldn't affect profits. But change happens, given enough time.

    For now there are plenty of people, including me, who see oil as a problem. And there are plenty of people, including me, who go on driving gasoline powered cars, and don't necessarily go for the most fuel efficient cars. My next car will likely be a Tesla. But few can say that now. And I'll still have three or four gasoline powered cars. It might be a long time before many can say that their next car will be electric. With Tesla capturing 0% of the market, rounded to the nearest percent, it can grow several times bigger and still account for 0% of the market. But don't forget what both Warren Buffet and Albert Einstein said about compound growth.

    I won't say that big oil's days are numbered, or even that their years are numbered. But perhaps their decades are numbered.

  • Report this Comment On March 07, 2014, at 2:30 PM, 092326 wrote:

    The international oil companies may face greater problems in the future as is becomes more difficult to acquire reserves as many countries are nationalizing their oil holdings, which may in turn require the international's to buy up more and more companies to increase their own reserves.

  • Report this Comment On March 07, 2014, at 4:45 PM, whyaduck1128 wrote:

    Even when Buffett admits to making a mistake, something he is notably willing to admit, The Fool persists in acting like he's infallible.

    That said, XOM looks good to me, and Buffett buying more, while it doesn't make me buy, is welcome confirmation. When it comes to companies in which to invest (as opposed to his pronouncements on things like tax policy), I listen to the man.

    And if it's a case of believing Warren Buffett or that overbearing hypocrite Al Gore, whose family wealth and family political career was built on mineral royalties, I'll believe Mr. Buffett without a moment's hesitation.

    I ENJOY investing in all the things the "social responsibility" crowd publicly detests--fossil fuels, cars, defense and aerospace, tobacco, gambling, etc.--and I've made some good money doing it. I've also invested in some of their favorites, usually to my detriment. I did make money on TSLA but sold far, far too early.

  • Report this Comment On March 07, 2014, at 5:45 PM, mountain8 wrote:

    Well, if I could afford three or 4 gas cars, and you must have others, I could afford to invest in a dream that's really unproven, if I could afford multiple cars.

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