How Warren Buffett Plans to Profit from the U.S. Oil Boom

Oil and GasThe United States produced more crude oil than it imported in October for the first time in almost 20 years, the federal Energy Information Administration announced last week.

The U.S. also produced more oil in September than it has in any one-month period over the last 24 years, partially as a result of the rise of hydraulic fracturing, and the country is importing less than it has in 17 years.

It’s no surprise then that Warren Buffett just reported his third quarter portfolio update and he, or one of his recently hired fund managers Todd Combs or Ted Weschler, reported holding a single new stock in the third quarter:  Exxon Mobil Corporation.

The size of the Exxon holding suggests that it was a Buffett purchase.

There are collectively 43 stocks in Berkshire Hathaway’s portfolio, which is valued at $92.04 billion. Exxon joins a group of other oil and gas stocks in Buffett’s portfolio: National Oilwell Varco Inc. (NOV), Phillips 66 (PSX), Suncor Energy Inc. (SU) and ConocoPhillips (COP).  In total, energy stocks comprise 7.9% of its total.

Exxon Mobil Corporation (XOM)

Berkshire reported owning Exxon Mobil in the third quarter in an amended filing, but actually first bought the stock in the second quarter, without filing, and hid the fact until now. In the second quarter he bought 31,244,110 shares. In the third, it added 8,845,261. The average share prices for the two quarters were both $90.

The Exxon Mobil stake has a 3.7% portfolio weight and represents 0.91% of the $407 billion market cap company’s shares outstanding.

The most noteworthy change Warren Buffett made to Berkshire’s portfolio is the addition of a sizable new position – 40.1 million shares valued at $3.4 billion — in energy super major ExxonMobil (NYSE: XOM).  In fact, Buffett constituted roughly three-quarters of the position in the second quarter and obtained confidential treatment from the SEC in his previous filing as he continued to build the position.

In many ways, ExxonMobil is an obvious choice for Berkshire’s portfolio; here are three reasons Buffett selected it:

It’s just plain cheap

At 11.8 times estimated earnings per share for the next 12 months, ExxonMobil shares trade at a 23% discount to the S&P 500’s forward earnings multiple; meanwhile, it pays a 2.7% dividend yield against just 2% for the index. Furthermore, the valuation was lower when Buffett was building his position — the stock’s average forward earnings multiple was 11.3 in the second quarter and just 10.8 in the third quarter — the sort of multiples that ought to generate some interest when they are associated with one of the best managed, most profitable companies in the world.

ExxonMobil is the second-largest company in the world by market value

The reported value of Berkshire’s stock holdings per today’s filing is a staggering $92 billion. In addition, Berkshire generates a flood of cash on a permanent basis that Buffett must attempt to allocate profitably. (Berkshire’s operating cash flow for the first nine months of 2013 was $20.7 billion.)

As such, when it comes to publicly traded stocks, Buffett can’t waste his time on minnows; he needs to focus exclusively on hooking the largest groupers in the corporate ocean. With a market value of $407 billion, ExxonMobil — the world’s second most valuable company — is just such a catch. ExxonMobil’s size and liquidity enabled Buffett to make it his largest new position since he put more than $10 billion to work in another mega cap issue, IBM, in 2011.

ExxonMobil has longevity

Warren Buffett will only invest in businesses that have genuine staying power; for a long-term investor with a multigenerational time horizon, permanence is a very attractive quality.

Buffett’s confident that ExxonMobil shares that characteristic. We know this because in his 2011 shareholder letter, he argued against buying gold by comparing the far-in-the-future value of all the world’s existing gold stock in the world and a hypothetical portfolio of productive assets with the same current value made up of “all U.S. cropland…, plus 16 ExxonMobils.” In the conclusion of his argument, he writes:

A century from now… ExxonMobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions…

A century is a long time, but there is every reason to believe ExxonMobil will be churning out gobs of cash — and returning it to shareholders — for the next several decades. That’s not a bad start for a buy-and-hold investor, particularly when it is bought at the right price.

30 Responses to “How Warren Buffett Plans to Profit from the U.S. Oil Boom”

  1. November 19, 2013 at 1:59 am, Steve Mattison said:

    I used to work for Warren, he buys a lot of stuff, not all are good investments, oil probably is tho.

  2. November 19, 2013 at 2:37 am, Chris Sandys said:

    Oil Boom = Great supply. Not especially great for the commodity price, since greater supply means lower prices.

    The “oil” boom we are experiencing in the US is primarily natural gas. Yes – still petroleum, but much less easily used. It’s not the crude that people typically envision. We’re talking about apples and oranges here, since the two are not readily interchangeable.

    I don’t know about Warren Buffet on this call. At the end of the day, you can never go wrong with a crude investment, especially a developer that has leverage. But, I do expect this to lower the total return of BRK.

    • November 19, 2013 at 3:04 am, Charles Garcia said:

      The world’s top energy forecaster has tapped the United States to eclipse Russia within two years and take over the top spot. “We expect in 2015 the U.S. to be the largest oil producer in the world,” says Fatih Birol, IEA Chief. After scouring the globe for petroleum for the better part of a century, America’s move to become energy independent has never been more real. This is not just about natural gas its about oil.

  3. November 19, 2013 at 2:37 am, Harold Gardner said:

    I hope that we can strike a reasonable balance between recovering the oil & gas resources that we need and still maintaining a healthy environment. I am thrilled that this lessens our dependence on oil from unstable regions, but I look forward to solutions for our energy that are sustainable over the long haul.

  4. November 19, 2013 at 2:47 am, Josue said:

    Even if Buffet loses on this deal, he can write it off as a business expense to avoid other costs. I don’t see how he loses in either scenario.

  5. November 19, 2013 at 2:57 am, Daniel said:

    Its about time we started refining our own fuel. Its ridiculous how Americans have been paying as much as $5.00 a gallon in recent years, all because we import oil from other countries, rather than producing our own. We have as much oil as anyone else, so why were we letting foreign countries rob us? The more oil we can produce ourselves the better. Of course warren wants to tap further into the oil industry, especially if its earning money at home!

  6. November 19, 2013 at 4:12 am, Duncan Flynn said:

    I agree with Harlold … getting the oil …. but will we have an earth to still enjoy it …… plus Steve’s comment got me…. “I used to work for Warren, he buys a lot of stuff, not all are good investments, oil probably is tho.” ……folks he buys a lot of ‘stuff’ you only hear about the ones that he strikes it rich with… …. I need to learn this one…. do a lot of stuff…. something will stick….. thanks folks…. Duncan

  7. November 19, 2013 at 4:18 am, Miriam Slozberg said:

    It is not a big deal as he can write it off.

  8. November 19, 2013 at 4:21 am, Michael Alvaro said:

    Time to squeeze the last bit of profit out of oil

  9. November 19, 2013 at 4:24 am, Lynn O'Connell said:

    I agree with other commenters that America is way too dependent on foreign oil. And, if Exxon is positioned to profit from this oil boom, then probably a good call by Buffet. That said, I’d prefer to see us continue to look for alternative energy sources — fracking brings a whole new set of problems, and only solves the problem short-term. Hopefully, we’ll use that time to invest in technology that reduces our need for oil.

  10. November 19, 2013 at 8:42 am, olatunji.adetunj said:

    This is a true exposure to what really is going doing of Oil exploits, but really it is sad that government spend a lot of billions in this area of the economy and yet never look forward in working on alternatives that will give results…when there are alternatives you will have politics playing game to sideline it because it does not favor them.

  11. November 19, 2013 at 9:49 am, Erik van Erne said:

    How bad. There should be a real reneable energy boom in America

  12. November 21, 2013 at 4:16 am, Remo Pollastri said:

    It is never amiss to follow a savvy investor like Warren Buffett. I would also like to see the US look at renewables. Here’s hoping!

  13. November 21, 2013 at 4:57 am, Tom Mack said:

    Follow the Buffet!

  14. November 21, 2013 at 5:27 am, Joe Buchel said:

    Lets take a look at how the 10 billion in IBM has done. Since October of 2011 its flat far underperforming any index you wish to compare it to. Yes Buffet’s a great investor and of course you’ll point out he’s a long term buy and hold guy but the facts are the facts.
    And thats a huge % of the total portfolio.

  15. November 21, 2013 at 1:35 pm, Charles Ray said:

    While Buffet doesn’t always get it right, he’s right enough times to cause people to pay attention. In this case, I think he hit it.

  16. November 22, 2013 at 7:27 am, Terri Nakamura said:

    Warren Buffet is a smart and wealthy man, so when he speaks people listen. Energy independence is an important goal, and I believe the US has made great inroads in this area. But I do have concerns about how gas/oil energy resources are retrieved and their effects on the environment. There has to be a solution where the big guys can reap their profits while striving for good social/global citizenship.

  17. November 23, 2013 at 12:46 am, kariem primm said:

    cant lose with oil. #1 traded commodity in the world.

  18. November 23, 2013 at 12:49 am, kariem primm said:

    i do believe that there are many alternative sources of energy that are better for the planet and also more cost effective for the consumer. but as long as big business is in oil, it will be business as usual.

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  23. January 03, 2014 at 8:07 am, Mike said:

    Imagine a big yummy milkshake. put a straw in it and start drinking. but hey you want more dont you – go ahead and put ten more straws into your glass thats fracking shale. except you didnt start with a full glass you were already into the part where your straw makes noise before you threw all the extra straws in – sell Bershire

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