Buffett Buys Oil Stocks – GuruFocus.com

“I can’t think of anything more useful than oil!” —

Charlie Munger (Jobs, Portfolio)

After listening to Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) annual meeting on April 30, 2022, we thought it would be appropriate to frame the aggressive buying of Occidental Petroleum (OXY, financial) and Chevron (CLC, financial) in the first quarter of this year.

warren buffet (Trades, Portfolio) and Munger bought about $27 billion worth of stock in those two companies at about $52 a share on Occidental and about $160 a share on Chevron.

We would say that Buffett and Munger, who know more about clean energy by owning the largest energy utility in the United States, see an incredible margin of safety in these two stocks. Buffett says he read the transcript of Occidental’s fourth quarter earnings report/appeal and realized what a gush it was becoming. He already owned Chevron and felt that the stock prices of those two oil powerhouses were lagging far behind the profitability and free cash flow that rising oil prices would bring.

Here are some facts that might be helpful in understanding Buffett and Munger’s thinking:

  1. California gets nearly 50% of its electricity from natural gas, which is found in the process of drilling for oil.
  2. Russia has crippled its ability to serve its customers.
  3. Middle Eastern oil producers are witnessing terrorist attacks on their oil production and are unlikely to make up for shortfalls elsewhere in the world.
  4. Buffett says, “Those who think we’re going to quickly move away from fossil fuels and those who think we’ll never make the transition are crazy!”
  5. Munger said, “I can’t think of more awesome people than petroleum engineers and geologists creating new petroleum supplies.”
  6. Buffett and Munger consider oil a national security priority.

Buffett and Munger must know that oil will be extremely useful for much longer than expected by the investment markets. Production from new sources of oil is expected to occur at large companies like the two he bought. And that might not stop oil prices from climbing towards $150-$200 a barrel. If you think we’re kidding, consider that we’re at $104 a barrel with the most populous country (China) in the world on lockdown due to COVID-19. Chevron and Occidental own the land, the leases and have the talented people that Munger leased.

Why did he spend so much more on Chevron than on Occidental? Chevron is a massively capitalized company (about $315 billion) and the only way Buffett could spend $20 billion on Occidental would be to take it private. He doesn’t make hostile deals and what he would be willing to pay is less than what we think the company could be worth on the open market five years from now.

Buffett is looking at free cash flow and returns on equity going forward and pumping money into those ventures. In an extremely difficult stock market environment, these oil stocks could be a great way for Berkshire and Smead to avoid “stock market failure”.

The information in this missive represents the opinions of Smead Capital Management and should not be construed as personalized or individualized investment advice and is subject to change. Past performance is not indicative of future results. Bill Smead, Chief Investment Officer, wrote this article. It should not be assumed that investing in the securities mentioned above will or will not be profitable. The composition of the portfolio is subject to change at any time and references to specific securities, industries and sectors in this letter do not constitute recommendations to buy or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM relied on and assumed, without independent verification, the accuracy and completeness of all information available from publicly available sources. A list of all recommendations made by Smead Capital Management over the past twelve months is available upon request.

©2022 Smead Capital Management, Inc. All rights reserved.

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Steve R. Hansen