Warren Buffett's Energy Companies Stand Out Among the Crowd
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Warren Buffett's Energy Companies Stand Out Among the Crowd

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Berkshire Hathaway (NYSE: BRK-B) made lots of waves in the energy sector last year. This past year it spent $10 billion to acquire NV Energy as well as buy shares in Exxommobil (NYSE: XOM), Suncor......

Berkshire Hathaway (NYSE: BRK-B) made lots of waves in the energy sector last year. This past year it spent $10 billion to acquire NV Energy as well as buy shares in Exxommobil (NYSE: XOM), Suncor (NYSE: SU), and National Oilwell Varco (NYSE: NOV). Apparently, though, that wasn't enough for the Oracle of Omaha, because it just recently announced it would be buying Phillips Specialty Products, a division of Phillips 66 (NYSE: PSX), for about $1.4 billion.

Of course, Warren Buffett doesn't buy just any company, he buys great companies. Just look at Suncor. At the time, Canadian oil sands companies were selling their product at a steep discount to American benchmark prices and were also struggling to ramp up production. If you looked at Suncor, though, 91% of its production was selling at global benchmark prices and was on track to triple production by the end of the decade. That is when Warren pounced and gobbled up 18 million shares.

These kinds of moves are what separate Warren Buffet from the rest of us, and it isn't the only move he has made in the energy space. In the slideshow below, we go over all of Berkshire Hathaway's energy investments and why they fit the Warren Buffet style of investing.

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  • 1. Warren Buffett’s Energy Companies & Why He Loves Them
  • 2. ExxonMobil (NYSE: XOM) Total Investment: 40.1 million shares, currently valued at $4.044 billion •% of Company owned: less than 1% •Purchased in 2013 •Previously owned shares of Exxon in 1980’s with $178 million purchase. Had he not sold that position in 1985, position today would be worth over $3 billion Source: Exxonmobil Investor Presentation
  • 3. Why Warren Buffett Likes… • Strong, Profitable Business – Return on Capital Employed for XOM greater than 25%, industry average 13.5% • Lots of New Projects Coming Online – Over past several years, XOM has poured lots of money into business to develop major projects, several billions in capital tied up in not-yet-producing assets – Expects large portion of new projects to come online in next 2-3 years, will result in substantial boost in production and earnings • Despite Large Capital Spending, Sill Shareholder-Friendly – Bought back over 11% of shares outstanding over past 5 years – Increased dividend by 57% over same time frame, yield today stands at 2.54%
  • 4. ConocoPhillips (NYSE: COP) Total Investment: 13.5 million shares, currently valued at $955 million •% of Company owned: 1% •Purchased in 2006 •Holdings in COP as high as $3 billion back in 2009 •Recently sold 44% of stake in ConocoPhillips when Berkshire made the purchase of ExxonMobil earlier this year Source: Conocophillips Media Relations
  • 5. Why Warren Buffett Likes… • Turnaround Candidate to Stable Oil Producer, ShareholderFriendly – – – – Since 2012, spun off Phillips 66 and sold over $12 billion in international assets Putting major focus back on North American oil and gas operations 77% of income generated in OECD nations, 66% from U.S. & Canada Dividend yield of 3.95%, bought back 17% of shares in past 5 years • Ambitious Development & Undervalued – Looking to grow production 600,000 barrels per day by 2017 – Price to Tangible Book value of 1.67x, industry average of 1.9x • Why sell it then? – Balance portfolio: If held, XOM and COP would be greater than 5% of portfolio
  • 6. Phillips 66 (NYSE: PSX) Total Investment: 27.1 million shares, currently valued at $2.09 billion (pre-sale to PSX for Specialty Products) •% of Company owned: 4.5% •Purchased in 2012 •Acquired position in Phillips 66 when ConocoPhillips spun it off last year •Selling $1.4 billion worth of shares back to company to buy its subsidiary Phillips Specialty Products Source: Phillips 66 Media Relations
  • 7. Why Warren Buffett Likes… • Stable, Predictable, Profitable – Building new refineries extremely capital-intensive and difficult politically – Well positioned to profit from U.S. oil boom, strong presence in Gulf Coast – Becoming major gasoline & diesel exporter • Specialty Products Business – Just exchanged $1.4 billion in shares for the rights to acquire Phillips 66 Specialty Products business • Very Shareholder-Friendly – Bought back greater than 4% of shares outstanding since IPO and posts 2.1% dividend yield
  • 8. National Oilwell Varco (NYSE: NOV) Total Investment: 8.87 million shares, currently valued at $704 million •% of Company owned: 2% •Purchased in 2012 •Has been steadily increasing his stake in National Oilwell Varco over the past year. In May of 2013, Berkshire made a purchase to nearly double the size of its position Source: National Oilwell Varco Media Relations
  • 9. Why Warren Buffett Likes… • Mile-Wide Economic Moat – – – – Supplies Oil & Gas industry with almost any piece of equipment imaginable Strong relationships with customers Leaves little room for competition to enter market Over 90% of oil & gas rigs around the world have some piece of NOV equipment on them • Top Flight Management Focused on Sustainable Growth – Outgoing CEO Pete Miller repeatedly on top CEO lists – 10-year total return on NOV shares: 654.2%
  • 10. Suncor (NYSE: SU) Total Investment: 18 million shares, currently valued at $630 million •% of Company owned: 1.2% •Purchased in 2013 •Combined; Suncor, ConocoPhillips, and ExxonMobil produce 33% of Canada’s oil from oil sands Source: Suncor Media Relations
  • 11. Why Warren Buffett Likes… • Extremely Long-Life Portfolio – Company estimates of 23.5 billion barrels of oil in contingent resources – Oil sands projects positive cash generators for 50+ years – Expects to triple oil sands output by end of decade • Industry Currently Disadvantaged, Thus Undervalued – Lack of takeaway capacity puts oil sands prices at steep discount to other oil benchmarks, but Suncor gets 91% of oil priced at global benchmark price – Buffett bought Suncor at time when oil sands industry struggling with labor shortages and project delays, at time of purchase Suncor trading at price to tangible book value below 1.3x (industry average of 1.9x)
  • 12. MidAmerican Energy Holdings Total Investment: 89.8% ownership of business. Net assets worth $46.7 billion •Subsidiary of Berkshire Hathaway •Acquired in 2000 • Holding company for utility companies MidAmerican Energy, PacifiCorp, recently purchased NV Energy, and several natural gas pipeline subsidiaries •Over 7 million utility customers Source: MidAmerican Energy
  • 13. Why Warren Buffett Likes… • Can You Name a Larger Competitive Moat Than Utilities? – Public regulated utilities have built-in monopoly on certain regions of service – Acquiring companies with either adjacent or overlapping regions. Asset portfolio covers Illinois, Nebraska, South Dakota, Idaho, Wyoming, Utah, Nevada, Oregon, Washington, California, Arizona, and Hawaii. – Vertically integrated with natural gas pipelines to service power generation stations • Better-Than-Peer Performance – Net income margin of 12.94%, industry average of 6.6% – Return on Equity of 10%, industry average of 7.8%
  • 14. Burlington Northern Santa Fe Total Investment: 100% ownership of business. Net assets worth $74 billion •Wholly Owned Subsidiary of Berkshire Hathaway •Purchased in 2009 •Railroad derives over 25% of revenue from oil and coal shipments •BNSF owns all but two rail links between US and Canada west of the Mississippi River Source: commons.wikimedia.org/NE2
  • 15. Why Warren Buffett Likes… • Railroads, Another Business With Massive Moats – Building new rail is extremely expensive and challenging politically – To be a successful railroad, you need large network of interconnected nodes for fluid transportation of goods – Burlington Northern Santa Fe owns largest rail network West of Mississippi • Well Positioned to Capture Oil-Via-Rail and Coal Markets – Has Rail Links between every major shale formation in U.S. and refining hubs in Gulf Coast, Midwest, and West Coast – Rail links between Powder River Basin and potential coal export facilities on West Coast
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