By Alex Kimani
For decades, Berkshire Hathaway (NYSE:BRK.B) chairman and CEO Warren Buffett maintained a pretty conservative approach to investing, favoring retail and banking stocks while avoiding sectors such as tech and energy. However, he finally pulled the trigger on PetroChina Co. (NYSE:PTR) in 2002 and Apple Inc. (NASDAQ:AAPL) in 2011. The Oracle’s foray into energy and tech initially paid off after he realized a tidy $3.5B profit on PetroChina, while his $90 billion Apple stake now represents a ridiculous 20% of Berkshire Hathaway’s market value.
However, Buffett has lately been doubling down on his energy investments while trimming his tech and banking holdings.
After a period of relative calm last year, Warren finally announced some long-awaited investments, including a $4.1 billion investment in Chevron Inc. (NYSE:CVX), good for a nearly 2.5% stake in the giant oil company. Chevron is now the conglomerate’s 10th biggest equity holding.
Meanwhile, Buffett trimmed its holding in Apple to 887.1M shares from 944.3M and Wells Fargo (NYSE:WFC) to 52.4M from 127.4M shares, according to Berkshire Hathaway’s latest 13F filing.
Berkshire Hathaway has always operated on Buffett’s famous ethos of buying when the market is fearful and selling when it gets greedy. It, therefore, came as a huge surprise that the giant conglomerate remained muted when the market crashed in April despite sitting in a massive $137 billion cash hoard. But it appears that the energy sector has become too much of a bargain for Buffett to continue ignoring.
It’s also a clear sign that Buffett sees long-term value in a sector that’s been taking plenty of flak lately.
Buffett is not the only billionaire who’s doubling down on energy. Occidental Petroleum (NYSE:OXY), Energy Transfer LP (NYSE:ET),PG&E Corporation (NYSE:PCG) worth more than $800 million combined are now in David Tepper’s top 12 holdings.
Here’s a peek into Buffett’s latest energy buys.
Chevron stock plunged to its lowest level since 2006 after the pandemic crashed the oil and gas sector, and has failed to fully recover despite a bright start to the year.
The integrated energy company posted a net loss of $5.5 billion for FY 2020, and the stock is currently trading 15% lower than a year ago.
With so much uncertainty surrounding the oil and gas sector and fears that it might be years before oil prices can fully recover to pre-pandemic levels, the ability of a company to withstand a prolonged bust cycle is an important consideration.
And…Chevron wins the stress test by a country mile.
Wood Mackenzie, a global energy, renewables, and mining research and consultancy group, has reported that Chevron Corp and Royal Dutch Shell (NYSE:RDS.A) are the most resilient, thanks to their robust deepwater projects and LNG as well as less exposure to high-cost assets.
Investing in Big Oil companies like Chevron comes with some risks, though.
Wall Street has been rapidly raising its climate standards, with BlackRock Inc. (NYSE:BLK), the world’s biggest asset manager, recently disclosing plans to pressure companies to do a lot more to lower their carbon emissions by leveraging the massive weight of his firm mammoth asset base.
Chevron has not been moving as quickly as some of its European rivals and continues to expand its oil footprint, including its $5 billion purchase of Noble Energy last year. CVX has failed to make major investments in solar and wind beyond supporting its own power needs, meaning buying Chevron is a bet that oil demand will fully recover from Covid-19 despite growing public pressure.
That’s a possibility, but no longer seen as a given.
Perhaps Buffet’s gamble will pay off, but it’s clear the road ahead won’t be easy.
#2. Dominion Energy
In July, Berkshire bought natural gas transmission and storage assets of Dominion Energy Inc. (NYSE:D), paying $4 billion in cash for the assets, and assuming $5.7 billion in debt.
Under the deal, Berkshire Hathaway Energy acquired 100% of Dominion Energy Transmission, Carolina Gas Transmission, and Questar Pipeline as well as 50% of the Iroquois Gas Transmission System. Berkshire also landed 25% of Cove Point LNG, one of just six export-import and storage facilities for liquefied natural gas in the U.S.
The purchase greatly increases Berkshire’s footprint in the natural gas business, increasing its carrying market share to 18% of all interstate natural gas transmission in the United States, up from 8% previously.
And that might turn out to be one of Buffett’s better energy buys.
With bond yields stuck at historic lows, Barron’s recently said that the best yield opportunities are clustered in the equity markets, ranking energy pipelines as the best income investment opportunity for 2021 ahead of dividend stocks, electric utilities, REITs, telecoms, convertibles, and junk bonds in that order.
Dominion Energy also has better green credentials than most of its peers.
Dominion Energy has outlined plans to spend a massive $72B on capital investment in decarbonization by 2035, which it estimates should help drive a 10% annual shareholder return for its regulated utility operations, making it the largest regulated decarbonization investment opportunity in the country.
Dominion plans to spend $32B during 2021-25 to support its “clean-energy profile,” which it estimates will generate 6.5% annual EPS growth and a ~3.5% dividend yield for a ~10% total shareholder return.
Dominion Energy has been selling off after recently cutting its dividend, but thankfully, its peers Enterprise Products Partners (NYSE:EPD) and Salient Midstream & MLP (NYSE:SMM) are still decent picks.
#3. Suncor Energy
According to Berkshire Hathaway’s 13-F filings for Q2, the company bought around five million shares of Canadian oil kingpin Suncor Energy Inc. (TSX:SU) (NYSE:SU) during the second quarter. Berkshire now owns 19.2 million shares of Suncor worth ~US$217 million.
At first glance, Buffett’s purchase of Suncor stock appears to have been driven by his long-term ethos to buy companies that are undervalued compared to their intrinsic values. After all, Suncor never truly recovered from the 2014 oil crisis and has been on a particularly sharp downtrend over the past two years. The Covid-19 pandemic and the oil price war only served to exacerbate the stock’s unfortunate trend.
But there could be something deeper than that.
It appears Warren Buffett is a big fan of Suncor’s assets, especially its long-lived oilfields with a lifespan of approximately 26 years. Suncor’s dependable assets have helped the company generate stable cash flows and pay out consistently high dividends. Suncor had consistently increased dividends since it began distribution in 1992 till the 2008 financial crisis. The company, however, slashed the dividend by 55% in April due to the pandemic, but boasts a still respectable forward yield of 4.6%. Thankfully, the deep dividend cut really helped shore Suncor’s balance sheet which is now among the most resilient among its peers.
In fact, Suncor revealed that it requires WTI prices to be north of $35/barrel to meet capex and dividend payouts. With WTI prices now in the high 50s, Suncor appears well placed to maintain that dividend and maybe even raise it in the not-so-distant future.