On November 14, 2013, Berkshire Hathaway (BRK.A) (BRK.B) submitted its Form 13F to the U.S. Securities and Exchange Commission. Institutional investors file Form 13F on a quarterly basis to disclose their individual investment holdings to the public. This latest SEC Form 13F presented a snapshot of the Berkshire Hathaway equity portfolio, as reported upon September 30, 2013. On that date, Warren Buffett and his Berkshire Hathaway investment vehicle owned 40,089,371 shares of Exxon Mobil (XOM) stock. Exxon closed out its November 15 trading session at $95.27, which was then a 2.2% gain, upon news that Buffett was buying. The Berkshire Hathaway stake in Exxon is now worth roughly $3.7 billion.
Last quarter, on August 15, 2013, Berkshire Hathaway (BRK.A) (BRK.B) filed Securities and Exchange Commission Form 13F for that quarterly period ended June 30, 2013. Berkshire then held 24,123,911 shares, or $1.4 billion, worth of ConocoPhillips (COP) stock, at the time. Over the next 90 days, Berkshire traders were to sell off 10,594,641 shares of ConocoPhillips. Although Wall Street may appear somewhat befuddled by these series of transactions, Buffett watchers recognize the idea that the Oracle of Omaha often prioritizes return on equity calculations above nominal dividend yield and share price performance. Buffett fashions himself as a long-term business owner, rather than a short-term casino gambler. As such, The Oracle must figure Exxon to be cheap.
1984: Buffett is Coming Home
In 1984, Warren Buffett itemized a 3,895,710-share Exxon stake, which has been buried deep within the Berkshire Hathaway Chairman's Letter archives. Exxon made a brief appearance within this treasure trove of information, where Buffett revealed investing $173.4 million into a Big Oil Exxon position that had grown to $175.3 million at year's end. By the close 1985, Buffett was to have promptly sold Exxon, while moving on to establish Wells Fargo (WFC), Coca-Cola (KO), and American Express (AXP) positions as long-term pillars of his then burgeoning Berkshire Hathaway Empire.
On December 31, 1984, Exxon stock closed out the year at a split-adjusted $2.11 per share. In today's terms, Buffett's original 3,895,710-share bloc therefore calculates out to 82.2 million shares of Exxon. On November 29, 2013, Exxon Mobil stock closed out the trading session at $93.48 per share. Buffett's original $173.4 million Exxon stake would now be worth $7.7 billion, had this icon of patient investing held on through the Valdez disaster, Mobil takeover, and Iraq War. A strong case can be made that Buffett abandoned the Exxon ship, far too early. The Oracle of Omaha certainly missed out upon the halcyon days of Larger than Life Oil Man Lee Raymond.
Ironically, 1984 is now mostly associated with George Orwell, and his novel tracking the machinations of a somewhat underground resistance to a totalitarian regime. The term 'Orwellian' emerged to describe a contradictory communication style of maintaining outward appearances, while working behind the scenes to coordinate plans that are more so in line with reality. The business community, of course, is notable for its Orwellian double-speak, as a necessity to both attract clients and also maintain the all-important confidence under girding financial markets. At Dow 16,000, Warren Buffett, by his actions, may be looking to park cash before stocks cycle through secular decline. The Oracle, of course, recognizes that any direct warning out of Omaha pontificating upon a looming bear market would spook investors.
ExxonMobil Vs. ConocoPhillips
A strict interpretation of The Law of Large Numbers would designate Exxon Mobil as one of the more ideal receptacles to park Berkshire cash. Exxon Mobil, with its AAA debt rating, offers access to higher quality securities than the Federal Government. Berkshire Hathaway Class A stock now trades for a near $175,000 per share, or roughly $300 billion in market capitalization. Of this amount, Warren Buffett manages a $100 billion stock equity portfolio, which is a unique backstop for insurance float and a collection of businesses that have generated an average of $17.3 billion in annual cash flow from operations, over the past five years. Buffett obviously must commit to making large-scale investments, in order to move the needle at his own Berkshire Hathaway bottom line. Exxon Mobil and ConocoPhillips are now attached to respective $408.0 billion and $89.2 billion market capitalization price tags. If need be, Berkshire Hathaway traders can 'back up the truck,' to aggressively purchase Exxon shares, with less fear of driving prices up and effectively bidding against themselves.
Taken further, in terms of cash management, Exxon Mobil and ConocoPhillips executives pitch somewhat divergent strategies regarding the return of capital to shareholders. ConocoPhillips promotes robust dividend payouts, while Exxon executes aggressive stock buy back plans. Exxon Mobil has remained somewhat infamous for its stingy dividend policy dating back to Godfather John D. Rockefeller and Standard Oil. The Exxon stance towards dividends is more so in line with Buffettology, or an investment philosophy that favors the reinvestment of capital back into growth businesses above dividend payouts. For mature businesses, Buffett has gone on record to indicate his preference for buybacks above dividends. Berkshire Hathaway itself has only made one dividend payment with Warren Buffett at the helm. In 1967, Berkshire Hathaway investors did receive one ten-cent per share dividend. At currents rates, Berkshire may save $1 million per year in taxes per each $1 billion invested into Exxon, instead of Conoco Phillips.
Big Oil Dividend Yields
Royal Dutch Shell
Last year, in 2012, Exxon generated $56.17 billion in cash flow from operations. Of this amount, Exxon spent $10.1 billion and $21.1 billion, respectively, on dividends and repurchases of common stock. Through the first nine months of this year, Exxon has went on to return a total of $20.8 billion back to shareholders through dividends ($8.1 billion) and buybacks ($12.7 billion in net purchases), despite the fact that nominal net income has actually declined by 34% on a year-over-year basis. Exxon has bought back 230 million shares of stock, over the past year. Without the buybacks, Exxon would have taken down $1.72 in Q3 2013 earnings per share, instead of the actual $1.79 EPS. Alternatively, ConocoPhillips has paid out $2.5 billion in dividends, while spending nothing to buy back outstanding shares of stock, through the first three quarters of 2013. ConocoPhillips is unwittingly foregoing the time-honored maxims of Buffett. Again, Warren Buffett has repeatedly pounded the drum for corporations to prioritize capital reinvestment and shareholder buybacks above dividend payments throughout his legendary investment career.
The Bottom Line
Shares of Exxon Mobil stock have significantly underperformed those of both Chevron (CVX) and ConocoPhillips over the past five years. Last year, on May 1, 2012, ConocoPhillips spun off its downstream assets as Phillips 66 (PSX). This move was a significant change of direction for the oil patch, as Conoco was to separate itself away from its traditionally low-margin refining and service station operations. Exxon, of course, remains a vertically integrated oil company that explores, produces, and refines fossil fuels. Going forward, Exxon management will be tasked with replacing crude oil reserves, while also balancing feedstock costs and petroleum product sales as a refinery. Warren Buffett appears willing to uphold a long-term view that integrated oil is a more efficient risk versus reward play than exploration and production. In the short-term, standalone exploration and production businesses can expose investors to extreme volatility.
Exxon, of course, is often lauded for its return on equity. Return on equity statistics are a true measure of efficiency, as these calculations divide net income by average shareholder capital employed through one fiscal year. ExxonMobil averaged a remarkable and Big Oil leading 26.4% annual return on equity between 2008 and 2012. This year, Exxon is likely to close out 2013 at a near 20% return on equity. Exxon return on equity calculations have squared with a management philosophy that hones in upon the profit maximization of big projects, rather than the precarious boom and bust portfolios of the lone wildcatters. Ironically, Buffett employs similar strategies as a reinsurance policy manager. Warren Buffett would rather walk away from a deal than expose his business to weak prices and unfavorable risk profiles.
Warren Buffett is coming home.