Chevron (CVX 1.54%) is already one of Warren Buffett's largest holdings. It currently clocks in as the third-largest position in Berkshire Hathaway's (BRK.A 1.18%) (BRK.B 1.30%) investment portfolio at 8.2%. It could become an even larger percentage even if Buffett and his team don't buy any more shares.
That's because Chevron is buying back its stock hand over fist. The oil giant recently boosted its buyback range again, which could see it gobble up a lot of shares in the coming years.
Buffett's top oil stock
At last count, Berkshire Hathaway owned nearly 167.4 million shares of Chevron, or about 8.7% of its outstanding shares. That position is worth almost $27 billion. It's the third-largest holding behind Apple at $136.2 billion (41.3% of the portfolio) and Bank of America at $35.5 billion (10.8%).
Berkshire's Chevron position is significantly larger than its stake in fellow oil producer Occidental Petroleum. While Berkshire owns 20.4% of the oil producer's outstanding shares, the 194.4 million shares are only worth $11.5 billion at the recent price. That puts Occidental at Berkshire's seventh-largest holding at 3.5% of its investment portfolio. While Buffett has won regulatory approval to increase Berkshire's stake in Occidental up to 50%, his company hasn't bought any more shares recently.
Buffett's company also hasn't recently bought any more shares of Chevron. Instead, his company slightly trimmed its position by selling about 2.3 million shares in the fourth quarter.
A meaningful repurchase program
Buffett's position in Chevron could grow to a larger percentage of Berkshire's portfolio if his team doesn't trim the position any further. That's because Chevron plans to buy back a big chunk of its shares in the coming years.
The oil company recently raised its share repurchase guidance range to between $10 billion and $20 billion per year. That's the third increase in the past year. It initially guided for buybacks of $5 billion to $10 billion before boosting that target to $10 billion to $15 billion: The company could repurchase a lot of stock, even at the low end of that range:
Image source: Chevron Investor Relations Presentation.
Chevron can achieve the top end of that range, assuming oil prices remain elevated in the near term before settling back down toward $70 a barrel by 2025. Meanwhile, it can repurchase shares at the low end of that range even if oil prices fall all the way back down to $50 a barrel. That's because it currently has a very low leverage ratio after building a massive cash war chest over the past year.
Instead of returning all its excess cash to shareholders over the past year like some peers, Chevron has saved some for the future. The company ended last year with $17.7 billion in cash, giving it an ultra low 3.3 net debt ratio. Because of that, Chevron has ample financial flexibility to invest in its new and traditional energy businesses, pay dividends, and repurchase shares even if oil prices cool off in the coming years. That strategy to repurchase shares across the oil market cycle has enabled Chevron to buy them at attractive prices over the years. On average, it has repurchased shares at $2 below the market value and almost half the current price over the last 20 years.
With oil prices still relatively elevated this year and the potential for higher prices in the second half, Chevron plans to buy back stock toward the top end of its range in 2023. Starting in the second quarter, it plans to raise its targeted annual share repurchase rate to $17.5 billion. That's up from a $15 billion annual repurchase rate at the end of last year. The company could ramp up to the top end later this year if oil prices remain elevated.
That buyback pace would see Berkshire's ownership percentage steadily increase if it doesn't alter its position. Meanwhile, Chevron would likely grow to a larger portion of Buffett's overall portfolio since the buyback should help boost Chevron's stock price.
Another potential upside catalyst
With oil prices remaining relatively elevated and its business flush with cash, Chevron is accelerating its share repurchase pace again. That should enable the company to retire even more shares, increasing the ownership interests of its remaining investors, including Buffett. That could give the share price even more fuel to rise in the coming months.
