Buying low: Berkshire is using this year’s dip in commodity prices to load up on some of Buffett’s favourite oil and gas investments. — AFP
NEW YORK: Warren Buffett’s multibillion-dollar purchases of oil and gas investments early in the pandemic have paid off when the sector cranked out record earnings in 2022. But instead of selling out for a huge profit this year, the Oracle of Omaha wants more.
Berkshire Hathaway Inc is using this year’s dip in commodity prices to load up on some of Buffett’s favourite oil and gas investments, showing that history’s most famous investor sees opportunity in a sector long disfavoured due to its volatility and effects on the climate.
Earlier this month, Berkshire agreed to spend US$3.3bil (RM15bil) to boost its stake in a liquefied natural gas export terminal in Maryland.
This year, it has also increased its holding in Occidental Petroleum Corp by 15% and bought more stock in five Japanese commodity traders.
Meanwhile, Berkshire’s energy division is lobbying hard for a bill that would see Texas spend at least US$10bil (RM46bil) on natural gas-fired power plants to back up its grid.
On one level, it’s classic bargain-hunting by Buffett and Berkshire vice-chairman Charlie Munger.
Persistent concerns over the sector’s environmental, social and governance (ESG) performance, poor pre-pandemic returns and the risk of declining demand for fossil fuels in the decades ahead have soured many investors on the industry.
Energy trades at the lowest price-to-earnings valuation of any sector in the S&P 500 Index, according to data compiled by Bloomberg. But it also generates the most cash flow per share.
“People are missing the economics that Buffett and Munger are looking at,” said Cole Smead, chief executive officer of Smead Capital Management, which manages US$5.4bil (RM25bil), including Berkshire and Occidental shares.
“The returns on capital in coal, oil and gas are off the charts compared with other sectors.
And with ESG, you can buy them cheaper than you otherwise would.”
But Buffett’s fossil fuel bet isn’t without nuances.
While Berkshire remains the third-largest shareholder in Chevron Corp, it cut its stake by about 21% in the first quarter.
Occidental, Cove Point LNG and Japan’s trading giants all have unique assets that will play a key role in powering the world no matter what path the energy transition takes, if it occurs at all.
Even Berkshire’s seemingly straightforward investments in oil have their subtleties.
Take Occidental. Buffett invested US$10bil (RM46bil) to help Occidental beat Chevron in a bidding war for Anadarko Petroleum Corp in 2019, and the company now owns an area the size of Jamaica in the world’s biggest and lowest-cost shale oil field.
At this year’s annual meeting, Buffett stressed how shale is different from conventional crude sources in Russia and the Middle East.
Shale wells, which make up the majority of US production, can be brought on quickly and have short lifespans, making operators more flexible in responding to oil demand and prices.
“In the United States, we’re lucky to have the ability to produce the kind of oil we’ve got from shale, but it is not a long-term source like you might think by watching movies,” he said, dubbing it “short-lived oil.”
Buffett also said “both extremes” in the climate debate have gotten “ridiculous” in their arguments.
“We will make rational decisions,” he said.
“We do not think it’s un-American to be producing oil.” — Bloomberg
