Back in the 1st quarter of 2006 Warren Buffett started buying ConocoPhillips (COP) for his Berkshire Hathaway (BRK.A, BRK.B). By the 3rd quarter of 2008 he had accumulated some 84 million shares. Then oil fell from near $150 a barrel to under $40 a barrel. Conoco fell from around $95 a share to $35. This is with Berkshire's cost per share averaging around $80. The timing of his purchase cost Berkshire billions. Buffett locked in the losses by selling over 50% of his stake. Fortunately that was to help facilitate the BNSF railroad acquisition, an exceptional deal. But the Conoco deal was a rare large error for the Oracle of Omaha.
Since then Berkshire has resumed placing some pretty big bets on energy, but that shouldn't make investors nervous. The Conoco purchase was very poor timing, and remains a bad investment for that reason. He is still right to be bullish on the energy sector moving forward. Prices for oil and gas are very, very likely to move higher in the future, even if as we can see it is pretty far from a linear process. Those with the most expertise in exploring for and tapping into reserves stand to benefit the most. Each investment Berkshire has recently been making has a notable competitive advantage.
Currently Berkshire only has 13.5 million Conoco shares remaining. Instead ExxonMobil (XOM) seems to be currently favored as a $3.45 billion stake was taken in the same quarter (3rd quarter 2013) that saw Berkshire again reducing its stake in Conoco. Exxon now differs from Conoco in that it is still an integrated oil company. Conoco spun off its refining, chemicals and midstream business as Phillips66 (PSX), which Berkshire still maintains a position in. Although Berkshire recently exchanged about 19 million shares, or about $1.4 billion in Phillips66 stock for PSX's pipeline services business. Berkshire also owns pipelines through its MidAmerican Energy Holdings.
Exxon's massive scale, abundance of cash and wealth of experience leaves it at the forefront of acquiring oil in tough terrains. Some investors have voiced concern that their dividend isn't quite up to par with what their competitors offer(although they do have 31 years of increases in a row), but their share buybacks have been gigantic, as a full 1/3rd of their shares have been bought back over the last decade.
Exxon is also historically about as consistent a slow and steady gainer as there is. Rarely over or underpriced, Exxon is a great stock to make purchases in without worrying too much about entrance points. Less volatile than Conoco, this might be a reason Buffett decided on Exxon moving forward.
Berkshire revealed a new holding during the second quarter of 2013 in Suncor Energy (SU), which happens to be my favorite of the bunch. Nearly 18 million shares are now held by Berkshire at a market value north of $600 million. Buffett typically makes Berkshire's largest investments, so it is possible it was Todd Combs or Ted Weschler who were the ones who made this bet. Buffett has shown interest himself in the Canadian oil sands though, taking a 2008 trip with Bill Gates to the Horizon Oil Sands project, being developed by Canadian Natural Resource (CNQ).
One of the major reasons Suncor is so attractive is that it has about 50 years of a stable and strong cash flow about as close to guaranteed as you can get. How many other companies can say the same? The recently announced Fort Hills oil sands project is an addition that adds substantially to the decades long dividend growth story this company should be.
Suncor, like every company involved in the Canadian oil sands has some environmental concerns in addition to worries about its reliance on 3rd party pipelines to bring its product to the market. I think most of these worries are more than priced into the shares, as Suncor was absent much of last year's stock rally. Nearly 30% below its high from 2011 this is looking like a bargain.
National Oilwell Varco (NOV) was revealed to be a new holding during the second quarter of 2012 and is also most likely a Weschler/Combs pick. Nearly 9 million shares are now held by Berkshire at a market value nearly $700 million. Dealing with exploration and production, this company is unique in that it is a provider of equipment for other companies to get their hands dirty with actually getting the oil. Instead of being exposed to volatile oil prices, this company's risk is with the spending decisions of its production, exploration and drilling customers. Its industry leading position in this area leaves no shortage of those customers though.
The rig technology business has a backlog of $15.15 billion currently, and last quarter saw net orders of $3.31 billion. A prodigious EPS grower, 2003 saw them at $.45 EPS and 2012 at $5.91. With a market cap of only $33 billion, NOV still is a smaller large cap stock with plenty of growth ahead of it. After seeing its shares double in value from the fall of 2010 into the start of 2011, they haven't moved much, offering a great deal. Much of the reason shares have been stagnant lies behind investor beliefs that orders for their equipment are at their peak, at least for the near-term. In fact EPS is estimated to fall a bit this year too, to $5.35. This is despite revenues being up 12%, because operating margins have fallen recently.
More and more this looks temporary. Thanks to some recent strategic acquisitions, operating margins are expected to rise in 2013 and 2014 by about 1% a year. EPS growth is also anticipated to resume its rise, with analysts now projecting near $8 a share by 2016.