Posts Tagged "Berkshire Hathaway"

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.