NEW YORK – Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, has made billions of dollars through his savvy investments in stable, blue-chip companies. Lately, he seems to be making a big bet on the oil and gas industry.
Berkshire’s two largest public stock holdings are in the oil majors Chevron and Occidental Petroleum. And through its subsidiary Berkshire Hathaway Energy, it has huge exposure to the energy sector as well. Although Berkshire does not own shares in ExxonMobil, the largest U.S. oil company, many investors see Exxon as a similar bet on the long-term strength of oil and gas.
So why is Buffett gung-ho about these companies, even as the world moves toward clean energy? What is it about Chevron, Occidental and Exxon that makes them still attractive? And most importantly for investors – should you follow Buffett into oil stocks this year?
The Bull Case for Oil Majors
At 87 years old, Warren Buffett is still making massive deals and putting billions of dollars to work. And a good chunk of that money continues to be invested in oil and gas companies.
There are several reasons why Buffett remains bullish on the oil patch:
- Demand is still growing. Despite rapid growth in renewables like solar and wind power, global demand for oil and gas keeps climbing. The International Energy Agency (IEA) predicts that demand will rise through at least 2030 as developing countries industrialize.
- Prices are high. After hitting negative prices in April 2020, oil has seen a huge rebound. Prices have stabilized above $80 per barrel, delivering big profits for producers. Many experts say expensive oil is here to stay.
- Majors are sharing profits. Giants like Chevron and Exxon are returning cash to shareholders through dividends and buybacks. They can still fund growth even with oil at $60-$70.
- The majors are getting leaner. To adapt to the energy transition, oil giants have slashed costs and lowered their break-even points. They generate cash even with lower oil prices.
For Buffett, then, oil majors represent a safe, profitable bet on a vital global commodity that isn’t going away soon. Let’s take a closer look at why he loves Chevron, Occidental and Exxon specifically.
Why Warren Buffett Loves Chevron
With a market cap of $340 billion, Chevron is the second-largest U.S. oil company behind Exxon. And it’s been a core Berkshire holding for decades.
Right now, Berkshire owns 38.2 million shares worth over $8 billion – making CVX a top 5 stock position. Berkshire has been gradually trimming its Chevron stake over the past year. But it still has mammoth exposure to the integrated oil giant.
There are good reasons why Buffett is a long-term Chevron shareholder:
- Track record of increasing dividends. Chevron has raised its dividend annually for 35 straight years. It yields a solid 3.8% at current prices.
- Disciplined spending. Chevron has flexed its financial strength by absorbing rival Permian driller Noble Energy and pulling back spending when needed.
- Exposure to future LNG demand. Chevron is investing heavily in liquefied natural gas (LNG) to cater to Asia’s growing energy appetite.
- Leadership in the Permian Basin. Chevron is the top leaseholder in America’s hottest shale region. The Permian provides a low-cost production base for decades.
- Strong balance sheet. With an AA credit rating and modest debt load, Chevron can weather industry downturns.
In short, Chevron has the global scale, operational excellence and financial fortitude that Buffett loves to see in an oil major. While CVX stock lacks excitement, it offers stability and income for conservative investors. That’s why the Oracle keeps it as a core holding.
Occidental Petroleum: Buffett’s Big Oil Gamble
Occidental Petroleum is a $60 billion E&P company focused on oil and gas production, mainly in Texas’ Permian Basin. With oil prices high, Berkshire has been aggressively buying Occidental stock over the past year.
Berkshire now owns 194 million shares worth over $13 billion. That gives Buffett a 20% stake in Occidental – making it his 6th largest public stock investment. It seems Buffett is making Oxy a cornerstone of his oil and gas bet.
On the surface, Occidental lacks the scale and diversification of Chevron and Exxon. Its focus is solely on pumping oil, not refining or chemicals. But Buffett must see value others are missing. Here’s the bull case for Occidental:
- Prime Permian acreage. Oxy has some of the most productive Permian land, including acreage acquired from its Anadarko takeover. As the lowest-cost basin, the Permian is key to Oxy’s success.
- Takeover appeal. Some speculate that Buffett wants full control of Oxy eventually. He already helped finance Oxy’s debt-laden Anadarko deal in 2019.
- High leverage to oil. With minimal downstream assets, Oxy is leveraged to the price of crude. If oil stays elevated, profits should gush higher.
- Dividend upside. Occidental slashed its dividend during the pandemic but has lots of room to raise it again. The current yield is just 0.8%.
Clearly, Buffett sees considerable value in Occidental’sPermian resources and high operating leverage. Oxy gives Berkshire concentrated exposure to oil production. Still, the risks are high due to its burdensome debt and lack of diversification. Occidental is Buffett’s boldest oil bet.
Why Buffett Doesn’t Own ExxonMobil Stock
Interestingly, Buffett has never bought a single share of ExxonMobil – even though it is the biggest U.S. oil major. With a market cap of $380 billion, Exxon produces 3.5 million barrels per day and has operations spanning the globe.
There are probable reasons why Buffett has passed on Exxon:
- High debt load. Exxon took on significant debt in the 2010s to fund capital spending. Its balance sheet is more leveraged than Chevron’s.
- Exposure to refining. Exxon owns major refineries that were hit hard early in the pandemic. Refining margins remain weak.
- Earlier move into shale. Exxon invested tens of billions in U.S. shale plays a decade ago. But it overspent, forcing it to scale back.
- Slower cost cuts. While Chevron and Occidental slashed billions in costs after the 2014-16 oil crash, Exxon was relatively slower to respond.
Still, many oil investors like Exxon’s industry-leading scale, its integrated business model, and its shift toward more disciplined spending under CEO Darren Woods. The dividend yield is an attractive 3.3%. And after several lean years, Exxon is poised to start generating massive cash flows again at today’s higher prices.
So is Buffett making a mistake by passing on XOM stock? Or does he simply prefer Chevron and Occidental as his main oil holdings?
Should You Buy These Oil Stocks Now?
History shows that trying to replicate Buffett’s moves doesn’t guarantee success. After all, he has access to information and wisdom most investors lack.
That said, the oil patch looks attractive now for several reasons:
- Demand is inching higher as the global economy recovers.
- Supply constraints persist, with OPEC+ only gradually easing curbs.
- The majors are gushing cash at today’s prices of $80+ per barrel.
- Oil and gas stocks remain cheap with single-digit P/E ratios.
- Dividend yields of 3%-5% provide income that beats bonds and CDs.
Buffett’s big bets on Chevron and Occidental, then, are rooted in sound logic. However, oil and gas stocks do carry risk.
The energy transition continues to gain steam. If renewable costs keep falling, oil demand could peak sooner than expected. And provisions in the new Inflation Reduction Act will accelerate the shift to clean tech.
Meanwhile, an economic downturn could easily send oil back into the $50s or lower – eating into producers’ profits.
So what’s the best way to play the sector? Conservative investors should stick with the most stable, diversified majors like Chevron. Those with a higher risk appetite can bet on Occidental’s upside. And investors looking for income and relative safety can consider all three companies.
Just remember to size your positions appropriately and diversify – advice Buffett himself would give. The Oracle is clearly bullish on oil stocks now. But he always invests with a long time horizon.