2 Investing Lessons From Warren Buffett’s Huge Energy Bet | personal Finance

(Mark Blanc)

When Warren Buffett makes a big bet on something, the finance industry pays attention. Frankly, if Buffett is anything to go by, the investment community is watching carefully.

And for good reason. their holding company, Berkshire Hathawayhas provided an annual rate of return of about 20% since 1965, which is more than twice the rate of return from S&P 500 at the same time.

This year, Buffett has bet big on energy, especially oil companies. According to Berkshire Hathaway’s most recent 13F (an SEC-mandated form that institutional investment managers file on a quarterly basis), Buffett invested more than $25 billion in oil companies in the first quarter of 2022.

There are two valuable investing lessons we can draw from this massive bet on the fossil fuel industry.

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Invest in stocks with secular tailwinds

The oil and gas industry performed exceptionally well in 2022, a year when Overall market fell Big. The reasons are quite clear. When the lockdown came into force in 2020, people stopped driving and the demand for petrol fell overnight. This resulted in a significant reduction in drilling by oil companies. But recently, as people started returning to work and stepping out of their homes after the lockdown, the demand for petrol skyrocketed.

Then Russia invaded Ukraine, which further curtailed oil supplies. In other words, demand has increased and supply has decreased. You don’t need to have a PhD in economics to understand why oil prices are skyrocketing this year.

So, it makes perfect sense that Warren Buffett has invested in oil companies lately, but is this really a “secular tailwind”?

According to US Energy Information Administration forecasts, US crude oil production is expected to average 11.9 million barrels per day (B/D) in 2022 and 12.8 million B/D in 2023, which is most of the US crude oil production in a single year. will set a record for single year.

While it may seem that we are on the verge of ending our dependence on fossil fuels, in fact we are setting new records for oil production. If these forecasts are accurate, it is clear that our society is not moving to renewable energy as our primary energy source anytime soon.

This is what Buffett is betting on, and so far it has paid off.

invest in what you know

Buffett and Berkshire Hathaway are investing in energy companies for many years, so it’s safe to say that this is an area they understand very well. While the rest of the world wrote off the fossil fuel industry as an aging dinosaur, Buffett used his in-depth knowledge of the oil production process to his advantage.

In the first quarter of 2022, Buffett bought $7 billion worth of shares Occidental Petroleum (NYSE: OXY) and increased its stake in beam (NYSE: CVX) over $20 billion.

So far, those bets have paid off tremendously:

CVX Total Return Level data by ycharts

At first glance, you might think that this investment is just a runaway short-term speculation on the price of oil. But if you delve deeper into the intricacies of the industry, you start to see why Buffett has made such a big bet on these two companies.

Two tables to understand the oil and gas industry

The fossil fuel industry is complex, but the two tables below can shed some light on Buffett’s strategy for investing heavily in the sector.

First, the oil and natural gas industry is divided into three streams: upstream, midstream and downstream. Here’s an analysis of each’s role in the overall production process:

over the river



locating new oil fields

crude oil and gas storage

Refining crude oil and natural gas into finished product

Drilling Wells / Offshore Rigs

oil and gas transportation

Selling to distributors (gas stations, domestic gas providers, fertilizer producers, etc.)

crude oil extraction

operating pipeline

Sometimes selling the finished product directly to the consumer

Some companies operate in a single stream, while others participate in the entire spectrum. These are known as “IntegratedOil and gas companies.

While it’s understandable to think that any company operating in this industry would be greatly affected by the rising or falling price of oil, it’s not necessarily true, and Buffett understands this.

The next table shows how each stream is affected by oil prices.

How different energy flows are affected by oil prices

over the river



worst hit

less affected

least affected

this is because…

The cost of extracting the raw product is very high and is largely fixed, while the price they can sell it for fluctuates. If the price of oil falls, so does the profit margin.

this is because…

These companies charge for transportation of crude oil, they do not sell it. This means they are more protected against price fluctuations; However, they are not immune. As prices fall, less oil is extracted and less transport is required.

this is because…

As these companies refine crude oil into usable products, they charge a premium, which gives them pricing power.

Chevron and Occidental Petroleum are both integrated oil companiesWhich means they own and operate assets in all three streams of the production and refinery process.

So, while these companies have benefited enormously from the growth oil pricesThey are also protected from price drops in the future.

play to your strengths

The main benefit from Buffett’s Energy Bets is to look at sectors and industries in your area of ‚Äč‚Äčexpertise as you will recognize unique opportunities. And while those sectors benefit from macro-economic tailwinds, you may be looking at a once-in-a-decade buying scenario.

As a long-term investor in the oil and gas industry, Buffett was able to look at the writing on the wall and understand that this is not a short-term boom for integrated oil companies. beam and Occidental Petroleum.

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mark blanc Have no position in any of the stocks mentioned. The Motley Fool has positions and recommends Berkshire Hathaway (B Share). The Motley Fool recommends the following options: long January 2023 $200 call on Berkshire Hathaway (B Shares), January 2023 $200 short call on Berkshire Hathaway (B Shares), and January 2023 short $265 on Berkshire Hathaway (B Shares). Call. The Motley Fool has one Disclosure Policy,

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