It was disclosed recently that Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) added Exxon Mobil (NYSE:XOM) to its portfolio and reduced its stake in ConocoPhillips (NYSE:COP) in the last reported quarter. I hate to quibble with the greatest value investor of the last two generations, but I think the "Oracle of Omaha" got this one wrong for a couple of reasons:
ConocoPhillips sports a forward PE of under 11.5x forward earnings, Exxon Mobil currently has a forward PE right around 12. In addition, analysts expect revenue to fall slightly in FY2014 where ConocoPhillips should see a minor gain in sales next fiscal year.
ConocoPhillips also has a much higher dividend yield of 3.8% which is almost 50% higher than the 2.6% yield XOM currently pays. Conoco sells for around 5.5x trailing operating cash flow (OCF) where Exxon is going for ~9x OCF. Finally, ConocoPhillips sells at a much lower book value/price ratio (1.73) than Exxon Mobil (2.49).
More importantly to me is that ConocoPhillips is a much less complex organization and one that is easier to manage as a result. Conoco is roughly one quarter the market capitalization of Exxon Mobil. Conoco spun off its refinery and marketing assets last year in the very successful IPO of Phillips 66 (NYSE:PSX). It also has disposed of many overseas assets in order to become a much more focused North American energy producer. Roughly 60% of its capital budget is allocated to growing production in North America.
In contrast, Exxon Mobil is the biggest domestic integrated energy concern with a market capitalization of over $400B. It owns refineries, chemical plants and assets all over the globe. Rather than becoming less complex over the years, it has become more complex via acquisitions including the much panned $40B 2010 acquisition of XTO Energy right at the height of natural gas prices.
In terms of overall revenues, Exxon Mobil is much less focused on North America and has benefited less by the huge domestic energy boom over the last few years. To cite just one data point around the company's complexity, the company has refineries in 32 different countries. It is involved in E&P in places ranging from the deep Artic to Siberia. Despite this diversification of businesses and geographical assets, revenue is basically the same as it was in FY2008.
Betting against Mr. Buffett has been a fool's game for many decades. However, in this case I think he made a strategic mistake. I view ConocoPhillips as a better long-term bet than Exxon Mobil. It is selling at a lower valuation, has a significantly higher dividend yield, has a less complex business and will benefit to a greater degree to the continuing energy production boom in North America.