Buffett made a big bet on Big Oil in 2013

Berkshire Hathaway has taken recent positions in Exxon Mobil, Suncor Energy and Phillips 66. Here's why.

By MSN Money Partner Dec 31, 2013 1:52PM
File photo of Warren Buffett on the NBC News' 'Today' show on November 27, 2012 (© Peter Kramer/NBC/NBC NewsWire via Getty Images)By Robert Baillieul, The Motley Fool

America is in the midst of a quiet revolution. Across the country, new technologies are unlocking billions of barrels of oil and gas. And this development is so big that the IEA predicts the United States could be energy self-sufficient by 2035. 


It should be no surprise, therefore, that an opportunity this big has attracted the attention of legendary investor Warren Buffett. Over the past few years the Oracle of Omaha has been steadily increasing his energy holdings.


Unlike a test in high school, copying the answers from the smartest student in the class is actually a good practice in the investment world. So which energy stocks is Buffett adding to his portfolio? Let's take a look at three of his most recent purchases. 


Should you follow Buffett into this industry titan?
Whoever said the best things come in small packages was never an energy investor. This industry requires raw size and scale to take on the toughest energy challenges.


And it doesn't get any bigger than Exxon Mobil (XOM). With a market capitalization over $400 billion, this is the second-largest publicly traded American company. 


Why does Buffett like Exxon so much? It's the best capital allocator in the business. Over the past five years, the company has generated a return on invested capital over 25% -- the highest of its peers. 


Because of these high returns, the company can return an enormous amount of cash to shareholders. Year-to-date, Exxon has paid out nearly $8.1 billion in dividends. And because of its size, Exxon hasn't missed a dividend payment in 131 years. 


Additionally, over the past decade, the company has repurchased nearly half of its outstanding shares. This has allowed investors to increase their stake in a wonderful business while deferring taxes until they sell. 


Buffett owns 17.8 million shares of this oil sands stock
This year, Buffett started looking north to Canada to find new investment opportunities. In August, Berkshire Hathaway (BRK.A) disclosed that it had accumulated a 17.8 million share stake in Canada's largest oil producer, Suncor Energy (SU).


Chief Executive Steve Williams has engineered an impressive turnaround at the Alberta oil giant. Within one year after taking the helm, Williams has abandoned his predecessor's growth targets, scrapped the Voyageur Upgrader, doubled the company's dividend, and pledged to buy back 10% of outstanding shares. 


New production growth will come from Fort Hills bitumen mining project, and Williams has pledged to eke out an additional 100,000 barrels per day through low risk de-bottlenecking initiatives and refinery upgrades.  Additional pipeline and rail capacity out of Alberta should also start to reducing the discount for oil sands bitumen, thereby boosting Suncor's top line.

 

Why Buffett is bullish on this oil refiner
As Buffett once said, 'In business, I look for economic castles protected by unbreachable moats.' 


Phillips 66 (PSX) is vital to our day-to-day lives. The company owns 15,000 miles of oil and gas pipelines -- more than enough to circle the planet -- that move millions of barrels of valuable oil and gas around the country, daily. This ensures a steady demand for the commodities Phillips 66 ships and refines through its network.


Raw size and financial discipline has helped Phillips 66 achieve industry-leading returns. Year-to-date, Phillips 66 has generated a 15% return on capital employed -- the highest of its peers. This allows the company to richly reward shareholders. Today the stock yields 2.1%, and Phillips 66 has repurchased nearly 5% of its outstanding shares since going public last year. 


Meanwhile, the company is profiting handsomely thanks to a lack of energy infrastructure in the United States. Phillips 66 is making money hand over fist by buying cheap, domestic crude and selling refined products internationally at a steep mark-up. And because solutions to these problems -- such as lifting oil export bans, building new refineries, and laying new pipelines -- are politically sensitive issues, Phillips 66 is likely to continue earning excess returns for years to come. 


Foolish bottom line
Even if you aren't interested in any of these stocks, there are still something interesting themes to learn from this list. Every single one of these names a great capital allocators. Every management team is willing to skip investing in a low-return venture in favour of returning cash to investors. This is a great indication that management if working for the interests of shareholders. 


More from The Motley Fool

34Comments
Dec 31, 2013 2:50PM
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The circumference of the Earth is a little under 25,000 miles at the equator. This doesn't affect the price of PSX, but there's no good reason to throw out bogus science "facts."
Dec 31, 2013 2:45PM
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So Obama's pet billionaire is high on an industry that Barry despises? Anybody notice that it was one of Buffet's oil tanker trains that crashed and burned in N. Dakota?  The Keystone pipeline would prevent such tragedies,but the Obama administration is blocking it. Follow the money. 
Dec 31, 2013 4:07PM
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Imagine how much oil there would be if the Federal Govt would quit reducing the number of leases on public land. You know, our land.
Jan 1, 2014 1:37PM
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Fats...Do you really have any friends..??


ABS is lost in woods, with his kid, trying to figure out GPS Christmas gift..

Crazy 8s is what he is, yuk, yuk, arf, arf.

Phil of DD is an ignorant Redneck Cracker..

Rob Ford, will go completely off the rails someday and get shot.

Mr. Brucey lives in the box next door, shares a Library card with Fatty Cakes and Senor Aki.

Ms. Bambi is the blow up doll, stored in another box, other end of bridge on the 101.

We all know who/what V-L is, and will be getting different medications in 2014.


Anyway HNY to most, including my dear friend Warren Buffet...

Buffs, meet you at the truck stop off I-80 west, I'll pick up tab for the pie and coffee: you get the tip.

We can discuss those new oil patch choices,.... I've got some ideas too.

Didn't I tell you I sold or dropped Suncor about 3 year ago..?

See you there...Re-Tog 2014

Dec 31, 2013 6:40PM
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two-dads;  chevron is not in the picture because 'the oracle of Omaha' does not believe they fit his paradigm for investment;


Mac:  BP [British Petroleum], Shell [Royal Dutch Shell], Total [Italian?], etc. are NOT American.  Chevron [as all companies with red, white, blue logos] were part of the Standard Oil of New Jersey trust broken up by the 'fedrl gubmnt' in 1906 as a monopoly.  It's more "American" than you are.  Only goes to prove the lack of correct information manifested on blogs. 

Dec 31, 2013 2:43PM
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Where is Chevron in this picture??
Jan 1, 2014 10:42AM
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I am confused by who is good and bad according to the liberal gospel. Warren Buffett is good according to most Libs as he is well know for saying his secretary pays more taxes than he, the tax code is unfair and the rich should pay more. But then our hero invests in the evil, polluting, corrupt, earth threatening oil industry. That's just evil right?

So how can a saint do devilish things and Romney, whose family adopted across racial lines be a devil and do saintly things?  This liberal agenda thing is more confusing than the Koran. Hopefully a liberal high priest will help me out here. Al Sharpton would be a good choice to explain as he is a saint, a reverund, is always complaining about the rich not paying enough, even though he is years and $4.5 million behind in paying taxes. He has this hypocrite stuff down pat.

Jan 1, 2014 3:04AM
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Buffett, champion of bailout, is also leading beneficiary mcclatchydc
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There are a lot of people in the world demanding oil, and it looks like there are a lot of people in the world that can

produce oil.  I think they are going to get married.












Jan 1, 2014 8:54PM
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How cute is it that the writer thinks "15,000 miles of oil and gas pipelines" is "more than enough to circle the planet" which is 24,860 miles in circumference through the poles?  Journalism majors, Penny on The Big Bang Theory, Jake on 2 1/2 Men, etc.: peas in a pod and just adorable.

Seriously, the article doesn't seem to look past the surface, and it doesn't explain why Buffett sold most of his Conoco Phillips holdings, despite the fact it is now primarily an exploration company and has made four recent signicant deepwater finds in the Gulf of Mexico.

It's easy to see that Buffett has bought something, then look at something good about that company, and then claim it's the durable advantage that led Buffett to buy it.  But it's like looking at Ducks flying north, note that Spring follows it, then conclude that Ducks cause Spring.

For example, if the pipeline owned by Phillips 66 "is vital to our day-to-day lives" and that's it's attraction, then why did Buffett just dump a ton of Phillip 66 shares for one unit of the company, Phillips Specialty Products, that makes primarily pipeline flow-assisting chemicals?  in other words he dumped the pipelines for a company that services them.


Dec 31, 2013 5:09PM
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is this story another way to raise the price of gas to make us poor suffer bvwhile making him and his other rich friends richer
Jan 1, 2014 2:49PM
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Yup probably right about CHK....I've moved on into more COP..

And building in Pipelines and Refiners..

Gonna pass for now.

Jan 1, 2014 11:01PM
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Maybe the Author was referring to the time it takes, to encircle the Globe and got confused.

Although in reality, I believe the Earth has been expanding slightly over the Eons and Centuries.


There is a school of thought that Buffet may have sold ConocoP too soon in favor of Exxon.

I don't know how many have lined up on different sides, but there is the question.

Buying the "services company" is normally a good move, he has done that in other investment choices...I believe Rails was one, and some in the Oil services sector.


The same reasoning, we have Pipelines...And Railroads; The price of products can waiver, but someone or something still has to transport it.

My feeling is, he is more or less just hedging one Company against another, and the deals BERK makes are nothing like what us little piss ants out here do, with our paltry sums. 

Dec 31, 2013 7:39PM
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I'm with Warren on this one...We have been accumulating more of these energy plays ever since 2008-2009....Was a pretty good time to buy-in on some.
Dec 31, 2013 3:38PM
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So this guy is unaware of a grade school statistic such as the circumference of the earth.  Gee, first the new math then public education in general, and you breed idiots.  Do you listen to idiots?
Dec 31, 2013 6:17PM
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Amusing how someo can spew so much crap, without knowing any facts..Maybe they can't read.?
Dec 31, 2013 7:36PM
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IQ68....Think Total is a French based Company...But most of these players operate everywhere in the World as Inter or Multi-Nationals...
Jan 1, 2014 1:04PM
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The TRUTH about Warren Buffett: 
When the rest of the country was building prosperity after World War II... Buffett wasn't investing in our economy, he was leeching off it. He made money off the profits of other people's toil, moxie and American Ingenuity. Never ONCE did Warren Buffett say- I have enough seed money to build a new enterprise... he continued to leech off the nation, hoarding capital and being frugal (read: detached from spending equal to his earning, like nearly every other American). Sadly, and because there are more leeches with every administrative-leani​ng generation, riding on the bandwagon rather than helping it move down the road has become a whole industry-- the Financial Sector. Today, none of us actually live, we live with and for financial tyranny. There are no enterprises because of Buffett and his sick ilk, just business platforms. You can go to college and get a degree in what amounts to leeching. THANK YOU WARREN. You created the end to the Greatest Nation on Earth.
Dec 31, 2013 4:29PM
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Warren sells great sofas at Nebraska Furniture Mart.
Jan 1, 2014 10:50AM
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Fraud Street starts the year off....... CLOSED! Now if we could only keep it closed the other 364 days of the year, America would heal from all it's wounds it has suffered from this atrocious PONZI SCHEME. The rich taking from everyone else. How sinfully delightful!

Stocks are not needed to be successful in life! Stocks are not needed to be wealthy in life! Stocks are not need to be healthy in life! Stocks are not needed to be happy in life! Stocks are not ever needed anywhere in the world!

DIE FRAUD STREET, FOREVER DIE!
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