6 Energy Stocks Warren Buffett Might Consider Buying

 |  Includes: BHI, CVX, HAL, HES, NOV, OXY
by: Investment Underground

By HD Carver

Warren Buffett is a self-described value investor. In the simplest of definitions, a value investor seeks out companies whose stock is under-priced and does not accurately reflect the intrinsic value of the company. Intrinsic, also by definition, is something basic and essential. It follows then that analyzing the fundamentals of a given stock will reveal its value as an investment.

In this commentary, my ambition is to select the six best energy stocks that sync up with the Buffett investment philosophy and offer you compelling arguments by way of the fundamentals, for inclusion in the Berkshire Hathaway Inc. (NYSE:BRK.A) portfolio at some point in the future.

As a prelude to this exercise, I created a spreadsheet with 32 companies currently in Warren’s portfolio and recorded the fundamentals as shown below. I then averaged the results to create a profile of the typical Buffett stock. I will be comparing the companies I have chosen to these averages. I should point out that I excluded Bank of America (NYSE:BAC) from this exercise because I believe it was an ‘engineered” acquisition and not representative of the portfolio as a whole.


Market Cap






Current Ratio

Dividend Yield

Pay Out Ratio











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I’ll begin with Occidental Petroleum Corporation (NYSE:OXY), a large cap ($95.92 billion) in the basic materials sector of the major integrated oil and gas industry. As many of you are no doubt aware, Buffett has existing holdings in Exxon Mobil Corporation (NYSE:XOM) and ConocoPhillips (NYSE:COP), so Occidental is no stretch. Occidental is trading at about $95.02 and has a price/earnings ratio of 12.29, a price/earnings growth ratio of 0.69, and a price to book of 2.15. Clearly, these fundamentals are superior to those of the average for a Buffett stock. This is also true for Occidental’s return on assets at 11.70, return on equity at 18.16 and current ratio at 1.62. Occidental’s dividend yield of 1.80 is below the average of 2.02 but well within the range of yields present in the 32 stocks that comprise the averages shown. In short, I don’t believe this yield would be a deal breaker for Mr. Buffett.

My next pick is National Oilwell Varco, Inc. (NYSE:NOV), a large cap in the basic materials sector of the oil and gas services industry. Price/earnings ratio is slightly higher than average. However, the price/earnings growth ratio of 0.96 and the price to book of 1.77 qualify this stock for the Berkshire Hathaway portfolio when viewed in the context of a return on assets of 7.25, a return on equity of 11.33 and a current ratio of 2.54. Dividend yield is below average but within ranges already known to exist in the portfolio.

Another realistic pick is Haliburton Company (NYSE:HAL), also in the basic materials sector of the oil and gas equipment and services industry and trading at about $36.58. This large cap has some impressive fundamentals. Haliburton’s price to earnings ratio of 13.26, price/earnings growth ratio of 0.42 and price to book of 2.71 all compare favorably to our averages. The same is true for Haliburton’s return on assets of 13.57, return on equity of 24.56 and current ratio of 2.82. While falling short on the dividend yield (0.10), forward annual yield projections suggest this will increase by a factor of 10. I think you will agree, on balance, this stock meets expectations for a Buffett holding.

I’m also keen on Hess Corporation (NYSE:HES) in the basic materials sector of the oil and gas refining and marketing industry. This large cap ($20.29 billion) is trading at about $59.65 and matches up nicely with our Buffett stock profile. The price/earning ratio, price/earnings growth ratio and price to book stand at 10.64, 0.77 and 1.07 respectively. All these numbers are consistent with a value stock and Warren is all about value! The return on assets of 7.23 and return on equity of 10.90 are somewhat lower than average, as is the dividend yield of 0.70, but any student of the Buffett investment portfolio wouldn’t raise an eyebrow at this one.

Chevron Corporation (NYSE:CVX) is a star pick across the entire range of data points. Chevron has a market cap of $202.51 billion and is trading at about $101.69 per share. The table below illustrates the fact that Chevron Corporation meets or exceeds the qualifications to enjoy a place in the Berkshire Hathaway pantheon.

The final selection for this exercise is Baker Hughes Incorporated (NYSE:BHI), with a market cap of $23.4 billion. The stock is trading at about $53.62 per share. The company operates in the basic materials sector of the oil and gas equipment and services industry. The price/earnings ratio of 13.32, the price/earnings growth ratio of 0.37 and price to book of 1.55 define this as a value stock right from the gate. The return on assets of 7.19, the return on equity of 11.97 and the current ratio of 3.12 parallel the requirements necessary to join the ranks of Berkshire Hathaway investments. The dividend yield is on point at 1.10 as well.

No one can know the mental processes of Warren Buffett or any other guru for that matter. We have to recognize that intrinsic value, like beauty, is in the eye of the beholder. The fundamentals we have examined here make a compelling case for these stocks, but we’ll have to watch and wait, and see if any of them end up on Warren’s plate.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.