Berkshire Hathaway Struck Oil in 2022
Or, as Charlie Munger wryly put it, “We found some things we preferred owning to treasury bills.”
Happy Wednesday and welcome to our new subscribers!
Hope you and yours are enjoying a peaceful and relaxing holiday season.
It was a very on-brand Christmas for me.
On May 1, 2021, Warren Buffett stymied ESG activists with a stirring defense of Chevron — and fossil fuels in general — at the Berkshire Hathaway annual shareholder meeting.
Chevron is not an evil company in the least and I have no compunction about owning Chevron. If we owned the entire business, I would not feel uncomfortable about being in that business. I think Chevron has benefited societies in all kinds of ways — and I think it will continue to.
I don’t like making moral judgments on stocks in terms of actually running the businesses. There’s something about every business that [if] you knew what, you wouldn’t like. If you expect perfection in your spouse or your friends or in companies, you’re not going to find it.
When Buffett delivered that rejoinder, Chevron was but a relatively minor piece of the Berkshire investment portfolio. In 2022, though, it emerged as one of the company’s most significant holdings this side of Apple.
Buffett first dipped his toes into CVX 0.00%↑ in 2020, but waited until earlier this year to take the full plunge. In Q1 2022, he added 120.9 million more shares — which is approximately 70% of Berkshire’s current Chevron position. All purchased in just one quarter. The man certainly knows how to make a splash.
He tacked on a little more in the second and third quarters to bring Berkshire’s stake in the oil giant to an impressive 8.8%. That makes Chevron the third-largest position in Berkshire’s portfolio — behind Apple and Bank of America — with a current value of $30 billion.
We’ve discussed Occidental Petroleum ad nauseam this year, but Buffett’s growing interest in Chevron might be the biggest Berkshire-related story of 2022.
What does Berkshire Hathaway see in Chevron?
It’s much the same story as Oxy:
Rising oil prices ➡️ Gushing profits ➡️ Healthy balance sheets
Trying to predict what the energy market will do in the coming years — or even over the next few weeks — is a fool’s errand. But both Chevron and Oxy insist that their good fortunes do not solely hinge on global events like inflation or war.
Sure, they will benefit from (temporarily?) higher oil prices — but they also promise that the current level of dividends and share repurchases can be sustained at much lower prices.
For Chevron, the magic number is $50 per barrel. As long as oil stays above that price, the company can indefinitely sustain the current dividend and buyback program.
And, while the price of oil remains high ($80 yesterday), Chevron is committed to sharing the wealth with shareholders. This year alone, the company has increased its share repurchase program from $3-5 billion to $5-10 billion to now $15 billion.
In Q3 2022:
“We delivered another quarter of strong financial performance with return on capital employed of 25%,” said Mike Wirth, Chevron’s chairman and CEO. “At the same time, we’re increasing investments and growing energy supplies, with our Permian production reaching another quarterly record.”
During the quarter, the company paid dividends of $2.7 billion (6% higher per share than Q3 2021), increased investments by over 50% from last year, paid down debt for the sixth consecutive quarter, and repurchased $3.75 billion of shares (more than 1% of shares outstanding).
After the cataclysmic oil market of 2020, numbers like those will set a battered balance sheet right in a hurry.
And Mr. Market has taken notice.
Chevron ranks as the top-performing stock in the Dow Jones Industrial Average with a year-to-date gain of 50.6%. Add in Occidental Petroleum’s own surge in the S&P 500 and Berkshire Hathaway’s budding oil-and-gas empire is off to a very strong start.
The Future of Fossil Fuels
Oil isn’t going away any time soon.
The belief that world economies and supply chains can make a drastic pivot away from fossil fuels in any time span less than multiple decades betrays a dangerous naïveté on the part of the dreamer.
But, that being said, renewables are obviously the future of energy. It’s just that no one can say with any certainty when that future will arrive. Eventually, “clean” power like solar, wind, hydroelectric, etc. will prove ascendant and take over the energy industry. You don’t have to hug any trees to believe in that inevitability.
Charlie Munger made much the same point in an interview with The Australian Financial Review this past summer:
I think we’re going to be using fossil fuels for a long time ahead, because we have to. If you stop to think about it, the present population of the world couldn’t eat if we didn’t use natural gas to create nitrogen fixer fertilizer.
We’re not going to get rid of fossil fuels — we’re just going to use less of them.
I also think more of the world’s power generation will come from renewables. Both things are going to happen. Berkshire is one of the biggest creators of renewable energy in the United States. In Iowa, where we own most of the electric utilities, way more than half of all electricity generation comes from renewables.
And I expect the likes of Chevron, Exxon Mobil, and Oxy to remain giants in a world powered by renewables. They will simply co-opt that green technology once it’s ready for primetime.
Even these “evil” companies will clamor to provide forms of energy that don’t require expensive and inefficient drilling or the production whims of cartels — as soon as the production, storage, and distribution of these renewables becomes a cost-effective value proposition.
And, if they don’t, entrepreneurs will create new companies with no such compunctions about renewables.
Capitalism, like Father Time, remains undefeated.
Back to Normal
Zooming out, 2022 was a refreshingly normal year for Berkshire Hathaway.
In 2020 and 2021, Warren Buffett and Charlie Munger surveyed the speculative excess on Wall Street and didn’t like what they saw. A red-hot market — full of inflated prices, overvalued companies, and debt-fueled buyouts — left few bargains to be found. During such times of manic frenzy, value-based investors can find themselves with precious little to do.
So Buffett and Munger adapted — and nimbly sidestepped this quagmire by using a portion of Berkshire’s massive cash pile to repurchase huge amounts of the company’s own stock. Over those two years, they spent an astounding $51.8 billion on buybacks.
This is not Buffett’s preferred avenue of capital allocation. He would much rather pull out his elephant gun and bag an operating business — or buy (undervalued) common stock on the open market — than repurchase Berkshire shares.
But desperate times called for desperate measures.
2022, though, has been a different story. With market valuations finally returning to some semblance of sanity, Buffett is no longer a net seller of stocks and the pace of buybacks has slowed to a relative crawl. Through the first three quarters of this year, Berkshire repurchased just $5.2 billion of its own stock.
Instead, he splashed more than $51 billion on stocks in Q1 2022 — opening new positions in Occidental Petroleum, Citigroup, HP, Paramount, and others — and snapped up Alleghany Corp. for $11.6 billion. Business as usual for Berkshire.
Or, as Charlie Munger wryly put it, “We found some things we preferred owning to treasury bills.”
With only a few days left on the calendar, Buffett and co. still hold a 20+% lead over the S&P 500 and remain on pace for their best finish against the benchmark index in fifteen years. It’s nice to know that the classic Berkshire Hathaway playbook, even after spending two years collecting dust on the shelf, is just as effective as ever.
A most excellent article! Thank you.
We agree hydrocarbons will be used for years to come in greater quantities than the crowd tends to think. But the eventual reign of wind and solar is far less certain due to their pathetic return on energy employed.