Warren Buffett Is Quietly Pouring Billions Into This Energy Boom

Warren Buffett has only made indirect investments in the shale oil boom, here's how you can profit.

Jul 19, 2014 at 10:09AM

The world's most respected investor, Warren Buffett has famously not made any investments directly in the shale oil boom. Apart from indirect exposure through ConocoPhillips and ExxonMobil, Buffett has stayed away from the domestic oil boom and indeed, the oil industry in general.

However, Buffett has made some key indirect investments in the shale oil boom. For example, two of Buffett's indirect plays on the industry are Phillips 66 (NYSE:PSX) and National Oilwell Varco (NYSE:NOV), as well as BNSF and pipeline logistics company Phillips Specialty Products. These four companies all display the famous Buffett criteria of a wide moat and industry dominance.

Key technology
Originally owned by Phillips 66, Phillips Specialty Products' business is the lubrication of oil's movement through pipelines. Planning the efficient movement of oil is an increasingly crucial process for the industry to move both tar sands crude and oil obtained via hydraulic fracturing. Without technology like this, there is no doubt that the domestic oil boom would be struggling.

Alongside Phillips Specialty Products, Buffett owns BNSF, which moves over 1 million barrels per day of Bakken crude to market, once again a key part of the domestic oil boom.

Of course, as both BNSF and Philips Specialty are owned by Buffett's Berkshire Hathaway, the only way for Foolish investors to get in on the action is to buy Berkshire shares, which in itself is never a bad idea.

However, for those seeking to invest like Buffett themselves, Phillips 66 and National Oilwell Varco are two great choices. 

All the Buffett qualities
Phillips 66 exhibits all the qualities of a Warren Buffett-style investment. The company is the largest refiner in the U.S. with assets around the world and as a result has impressive economies of scale and size that others can only dream of. Further, the company is well placed the benefit from the domestic oil boom. Specifically, the company is benefiting from low crude input costs and is divesting any high-cost refineries.

What's more, Phillips has been able to achieve sector-leading returns on capital as seen in this slide from the company's recent investor presentation. 


Source: Phillips 66 investor presentation.

Like all Buffett's investments, Phillips also looks after its shareholders. The company has returned $6 billion to investors through buybacks and dividends since the second quarter of 2012, and this is set to continue with the recently announced additional $2 billion share repurchase program -- this additional authorization brings the total authorization since the third quarter of 2012 to a $7 billion. 

In addition, Phillips has some lofty plans for growth in place. The company has earmarked $12 billion in growth capital from now until 2016 and analysts expect this to drive EPS to $6.66 this year and then $7.84 during 2015. That's an average annual growth rate of around 15%. 

Everyone needs a drill bit
Buffett's other indirect play on the shale oil boom is National Oilwell Varco.  

National Oilwell Varco is a giant of industry. With an 80% share of the market in "floater" packages, complete drilling systems for deep-sea wells, the company is essential to the global oil and gas industry. While floater packages are not directly relevant to the shale boom, National Oilwell Varco also manufactures drilling systems and provides project management for the whole oil service industry. Moreover, and here's when Buffett is likely to have found value, National Oilwell Varco is currently undervalued compared to peers.

For example, at present National Oilwell currently trades at a historic enterprise value/EBITDA ratio of 8.1 compared to Schlumberger's 12.4 and Halliburton's 10.4. Additionally, National Oilwell trades at a TTM P/E of only 14.8, compared to Schlumberger's 21.3 and Halliburton's 22.4. 

Still, National Oilwell has recently warned that business will slow over the next few months as several rig companies scale back newbuild programs. However, the rig business is cyclical, and National Oilwell is in a great position to profit when the market recovers.

Foolish summary
So all in all, Warren Buffett has avoided investing directly in the U.S. shale oil boom, but he has made indirect investments. Two of these investments are National Oilwell Varco, which will benefit from a rising demand for drilling technology and Phillips 66, which is profiting from the low cost of crude. 

If investors want to profit from the shale boom in Buffett style, Phillips 66 and National Oilwell Varco look to be two great picks.

Warren Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.


Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway and National Oilwell Varco. The Motley Fool owns shares of Berkshire Hathaway and National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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