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 (XOM +0.65%) -- 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 (COP +1.34%) 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 (PSX 0.18%) 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.
