By Alex Kimani
Every time Berkshire Hathaway founder and CEO Warren Buffett buys or sells a stock, the investing world tends to sit up and take notice. That’s mainly because the Oracle of Omaha has a better investing track record than your average hedge fund, managing to outperform the S&P 500 in 37 of the past 55 years, or about two-thirds of the time.
Buffett made his foray into the energy sector 18 years ago when Berkshire bought a $500 million stake in PetroChina Co. (NYSE:PTR) before selling it five years later for a $3.5B profit.
His energy track record after PetroChina has, however, been a mixed bag. His next big purchase, ConocoPhillips (NYSE:COP) in 2008, ended up losing Berkshire Hathaway Inc. (NYSE:BRK.B) several billions of dollars.
His biggest hit so far has been his 2009 investment in Burlington Northern Railroad for $44 billion. BNSF is a railroad behemoth that used to transport crude from the Bakken to refiners and still transports enough coal to generate 10% of the electricity consumed in the United States since the purchase. Berkshire has collected nearly $20 billion dollars in dividends from Burlington Northern Railroad, annual revenues have increased by 80%, and earnings have more than doubled.
Therefore, it pays to check and see what Warren thinks of the energy sector.
Here’s a delve into Buffett’s latest energy trades.
#1. 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 until 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 hovering in the mid-40s after several Covid-19 vaccines entered the fray, Suncor appears well placed to maintain that divided and maybe even raise it in the not-so-distant future.
Investors appear to love Suncor’s new financial structure and have bid up the shares 23% over the past 30 days.
#2. Phillips 66
Whereas Berkshire Hathaway’s Suncor purchase can be viewed as a big endorsement of the battered energy sector, it would be disingenuous to ignore the company’s bipolar moves on the sector. Notably, back in May, the giant investment company sold off its final stake in Phillips 66 (NYSE:PSX) despite repeatedly touting the company’s management team as one of the best in the business, especially as far as capital management is concerned.
Buffett’s love affair with Phillips 66 started well before the company became a stand-alone company. Back in 2008, Buffett purchased a stake in ConocoPhillips at a time when COP was an integrated oil and gas company, not the independent producer we know it as today well before the 2012 Phillips 66 spinoff. Berkshire sold off all of COP soon after the spinoff but maintained most of the 27 million shares of Phillips 66 it got after the event. Buffett loved Phillips thanks to two major traits: Great dividends and share buybacks. Indeed, in 2016, Berkshire owned a 15% stake in Phillips 66.
However, since then, Berkshire has been a net seller of PSX, with the latest sale marking the final divestment. Berkshire sold 227,436 shares of PSX in March to bring its holding to zero compared to the more than 80 million Phillips 66 shares it owned just four years ago. Buffett is perhaps alarmed at how badly refiners like PSX have been doing since the pandemic.
However, the oil and gas rebound over the past two months has still helped PSX stock gain more than 20% even though oil demand remains well below pre-pandemic levels.
The moral of the story: Undervalued energy stocks might still be a profitable play, especially after the Covid-19 vaccines begin to enter mainstream distribution. In fact, Goldman Sachs rates both Suncor and Phillips 66 as companies with solid comeback prospects after the latest vaccine developments.