Though they doesn't gain as much notoriety as monthly inflation data releases, Form 13F filings by prominent financial institutions and wealthy individuals are, arguably, the most important data dump of the quarter.
Financial institutions and individuals with at least $100 million in assets under management are required to file a 13F with the Securities and Exchange Commission no later than 45 days following the end of a quarter. A 13F provides a snapshot of what the most successful investors on Wall Street bought and sold in the latest quarter and can alert professional and everyday investors to stocks and trends that are intriguing America's top money managers.
Berkshire Hathaway's 13F isn't telling investors the full story
Warren Buffett's company Berkshire Hathaway (BRK.A -0.72%) (BRK.B -0.67%) is one such 13F filing that investors wait for on the edge of their seats each quarter. That's because the Oracle of Omaha has led his company's Class A shares to an aggregate return of 3,641.613% (through Dec. 31, 2021) since taking the reins as CEO in 1965. Even though no investor is infallible, Buffett has an exceptional track record for finding value.
But what you might be shocked to learn is that Berkshire Hathaway's quarterly 13F doesn't offer the full picture.
Back in 1998, Berkshire Hathaway agreed to buy reinsurance company General Re for a whopping $22 billion. While the lure of this deal was General Re's reinsurance operations and the complement they would provide to Berkshire's existing insurance operations, General Re also owned a specialty investment company known as New England Asset Management (NEAM). When Berkshire acquired General Re, it also purchased NEAM.
Even though Warren Buffett isn't actively involved in the management of NEAM's investment portfolio, what NEAM buys is ultimately owned by Berkshire Hathaway. This means New England Asset Management's close to $5.9 billion investment portfolio is, effectively, Warren Buffett's secret portfolio.
You won't find its holdings listed in a Berkshire Hathaway 13F or the company's quarterly operating results. But because of the size of its portfolio, NEAM is required to file a 13F every quarter, just like its parent company.
Warren Buffett's hidden portfolio just made a huge buy
Although there were plenty of small transactions made by New England Asset Management during the third quarter -- which you'd expect from a fund that owns 184 securities -- the stand-out trade from Warren Buffett's $5.9 billion secret portfolio was a big-time buy of oil stock Chevron (CVX -0.22%). During the third quarter, NEAM purchased 2,288,050 shares of Chevron, which increased its stake by 106% from the end of June 2022 and lifted Chevron's importance as a percentage of NEAM's invested assets to 10.85% (close to $638 million in market value).
Why pile into Chevron? The most logical reason would be to take advantage of historically high crude oil and natural gas prices. Chevron should be a prime beneficiary of a somewhat broken global energy supply chain.
During the COVID-19 pandemic, energy companies were forced to significantly pare back their capital investments. When coupled with Russia's invasion of Ukraine and the uncertain supply of energy commodities to Europe in the near term, there's simply no way to quickly boost global energy supply.
This is a recipe that should keep crude oil and natural gas prices above their historic averages. That's a good thing for Chevron, which generates its best operating margins from drilling.
Chevron is also, importantly, an integrated energy company. In addition to its drilling operations, it also operates midstream assets, such as transmission pipelines, and downstream assets, like chemical plants and refineries.
Midstream companies almost always rely on long-term, fixed-fee or volume-based contracts with drilling companies. In other words, their cash flow tends to be highly predictable no matter how volatile crude oil and natural gas spot prices are.
Meanwhile, downstream assets benefit when the price of crude oil declines. This lowers input costs and tends to improve demand for petroleum-based products. In short, Chevron is well-hedged for whatever the energy market throws its way.
Chevron's balance sheet is top-shelf among global energy majors, as well. The company ended the third quarter with just $8.2 billion in net debt, which is down from the $25.7 billion in net debt it began the year with. The company's debt ratio is a mere 13%, which is well below virtually all other large oil stocks. The takeaway is that Chevron has the financial flexibility to reinvest in its operations or make acquisitions as it sees fit.
Lastly, Chevron has been a beast on the capital-return front. The company intends to repurchase up to $15 billion of its common stock in 2022 and is currently doling out $5.68 per share annually -- a 3% yield. On a nominal-dollar basis, Chevron is paying nearly $11 billion in dividends to its shareholders each year. It's also increased its base annual payout for 35 consecutive years.
Although energy stocks could be in for some short-term turbulence if the U.S. economy were to enter a recession, the puzzle pieces are in place for Chevron to take advantage of historically high energy commodity prices for years to come.