Think Berkshire Hathaway (NYSE:BRK-B) and you think moat. You think Coca-Cola with its proprietary product and strong consumer loyalty. You think of capital-efficient, cash-producing companies like Geico, not capital-intensive commodity producers like energy companies. Buffett loves a product that differentiates itself from the competition, creating natural barriers and customer loyalty. Despite the commodity nature of the energy business, moats can still be built. And two of Berkshire Hathaway's widest-moat holdings can still be had at prices Warren paid.
Buffett rarely misses anything as obvious as our insatiable thirst for energy. With China rising, oil and gas prices are likely to face long-term sustained upward pressure. Naturally, Berkshire Hathaway is on board.
A look through Berkshire's 13F reveals five energy stocks: Conoco-Phillips and its spinoff Phillips 66 are long time holdings. Suncor holds a commanding Canadian oil sands position. Buffett's latest pick is the super-major, ExxonMobil (NYSE:XOM). All are large companies picked as a play on rising global oil prices. One of Berkshire's more modest positions, equipment vendor National Oilwell Varco (NYSE:NOV) might be the most interesting. Of the five, National Oilwell Varco and ExxonMobil seem to enjoy the widest moats.
Bigger is better
Some companies have moats. Others are moats. Scale is a huge advantage in the oil business and none compares to ExxonMobil. The largest publicly traded oil company on the planet pumped 5.3 million BOE per day of production in 2013. Its 25 billion BOE of reserves are evenly split between oil and gas, and scattered about the globe.
It has the political clout to operate in every corner of the globe, whether producing oil in virtual war zones like Iraq or wheeling and dealing with the likes of Gazprom. Few companies have the kind of capital strength and flexibility that ExxonMobil enjoys.
Net income topped $32 billion in 2013—and that was an off year. ExxonMobil averaged $35.5 billion over the past ten years, delivering over $19 billion in profits even during the darkest depths of 2009. It's a company that provides the predictability that Buffett covets.
It's also shareholder-friendly, having returned almost $136 billion in dividends and share repurchases to holders over the last five years. Book value is up 56% over the same time frame and share count is down 390 million. This is a predictable company that delivers tangible value to shareholders.
Berkshire's $4 billion position was built beginning in the second quarter of 2013 at an average price of $90.86. Prices are still relatively close to its accumulation range, allowing interested buyers an opportunity to get in on even terms with Buffett.
A tiny, interesting bet
Berkshire Hathaway's $700 million position in National Oilwell Varco is relatively tiny, but interesting. This acquisitive company is one of the largest suppliers of drilling equipment and supplies in the world. Over the years it's acquired an impressive stable of indispensable oil patch suppliers. National's equipment is installed on an estimated 90% of existing rigs.
A decade ago, National Oilwell Varco carved a niche, convincing shipyards and drillers that standardizing deepwater drilling rigs would enhance productivity. As operators stepped off into the deepwater, demands on equipment raised exponentially.
Standardization made construction, maintenance, and repair cheaper. Of course, that standardization revolved around its product suite, propelling National to its present offshore rig equipment dominance. The same business model is now being copied onshore.
Unconventional horizontal drilling is similarly demanding on equipment. Deeper projects and long horizontals require larger, more powerful rigs. Technological upgrades like real-time logging are simultaneously creating demand for new rigs and National is dominantly positioning itself to supply all the equipment needed to fit out these state-of-the-art bad boys.
There's also a razor blade element. Current technology is not only demanding on rigs, it eats through bits and pipe faster than before. With National's soup to nuts supply list for the oil patch, the company stands to benefit from increased demand for disposables as North America exploits it shale resources.
Shares of this wide-moat oil patch supplier first appeared in filings in 2012 and Berkshire kept buying through Q1 of 2013. Shares were even added during Q3 of 2012 as NOV moved to around $85 per share. After a brief pullback, shares now sit in the upper $70s, providing a cost basis in the general neighborhood of Berkshire's original entry.
Even in commodity businesses, moats can be crafted. Exxon and National may come at it from different directions, but both command the kind of wide economic moat that Buffett and Berkshire love. ExxonMobil enjoys the kind of scale that can't be copied. National Oilwell Varco sits in the catbird's seat with its unparalleled product suite as the industry retools for its future. Buffett's betting on them, and both are still available at prices near Berkshire's entry.