For decades, Berkshire Hathaway (NYSE:BRK.B) Chairman and CEO Warren Buffett maintained a pretty conservative approach to investing, favoring retail and banking stocks while giving a wide berth to more volatile sectors such as tech and energy. However, he finally pulled the trigger on PetroChina Co. (NYSE:PTR) in 2002 and Apple Inc. (NASDAQ:AAPL) in 2011. The Oracle's foray into energy and tech initially paid off after he realized a tidy $3.5B profit on PetroChina, while his $158 billion Apple stake now represents a ridiculous 47% of Berkshire Hathaway's $330B equity portfolio. Buffett's later energy buys, such as Suncor Energy Inc. (TSX:SU) (NYSE:SU), Dominion Energy Inc. (NYSE:D), and Chevron Corp. (NYSE:CVX) have all been bought at bargain prices.
Lately, however, Buffett appears to be deviating from his famous ethos of buying stocks with a decent margin of safety. After all, he has been doubling down on his energy investments while trimming his tech and banking holdings despite oil and gas stocks being at multi-year high valuations while tech stocks are decidedly cheaper.
To wit, the legendary investor has added new shares in red-hot E&P companies Occidental Petroleum Corp. (NYSE:OXY) and Chevron Inc. (NYSE:CVX) despite both currently trading at multi-year highs.
According to Berkshire's latest 13F filing, the company bought 118.3M OXY shares in multiple transactions from March 12 to March 16, bringing its stake in OXY to 136.4M shares, or ~14.6% of its shares outstanding. Berkshire also owns OXY warrants granting the right to acquire some 83.9M additional common shares at about $59.62 each, plus another 100,000 OXY preferred shares. Earlier, Berkshire revealed that it purchased about 9.4 million shares of oil titan Chevron in the fourth quarter, boosting its stake to 38 million shares currently worth $6.2 billion.
OXY has more than doubled over the past 12 months while CVX is up 55%, with both stocks trading at multi-year highs. But, obviously, Buffet thinks they still have plenty of upside, judging by the huge positions opened by his investment conglomerate.
Buffett is hardly alone.
A few days ago, OXY CEO Vicki Hollub bought a chunk of the company's shares on the open market, even as shares trade near three-year highs. According to an SEC filing, Hollub paid $798K on March 28 for 14,191 OXY shares at an average price of $56.24, raising her holdings to 467,282 shares and an additional 23,390 shares through a savings plan. Hollub last bought OXY shares on the open market nearly three years ago, when she paid $1.8M for 37,460 shares at an average $48.15/share on June 10, 2019.
Wall Street is enthralled by OXY, too.
Raymond James analyst John Freeman recently raised his OXY price target to $85 from $60, setting a new Wall Street high. That's good for nearly 50% upside.
OXY has 9 Strong Buy ratings, 2 Buy, 13 Hold, 1 Sell, and 1 String Sell ratings on Wall Street.
Meanwhile, Shale player APA Corp. (NYSE:APA) has popped to a 52-week high after Mizuho upgraded shares to Buy from Neutral with a $56 price target, up from $38, saying the company is in a "unique spot" among oil and gas producers.
Mizuho says APA has a "clear plan for 10%-plus cash return 2022-24 at current oil prices along with near-term growth (Egypt) and longer-term development (Suriname) catalysts outside the U.S."
ESG-driven pessimism
Buffett has been loading up on energy giant Occidental just as the company's stock price has been soaring as oil prices take off due to the Russia-Ukraine War and sanctions against Moscow.
Although western governments have encouraged the continued flow of Russian energy to global markets since the war in Ukraine began, numerous nations are self-sanctioning. The U.S. has completely banned energy imports from Russia; UK plans to phase out oil and gas imports by year-end, while the EU has pledged to cut energy imports by two-thirds by year-end.
Poland has become the latest to join European nations shunning Russian energy commodities after saying it will stop oil and coal imports by the end of the year. Poland is a major thoroughfare for Russian energy supplies, directly consuming ~330kb/d of Russian crude (CO1:COM) and is also home to the ~1.3mb/d Druzhba pipeline, which carries Russian crude to several points in Poland, Germany, and the Czech Republic. Further, Poland imported ~9.4mt of Russian thermal coal in 2020, accounting for ~5% of Russian exports.
And, make no mistake about it: the oil markets are likely to remain undersupplied for years to come, whether the Ukraine crisis is quickly resolved or not, thanks in large part to years of underinvestment amid the ESG boom.
Big deficits
According to the leading energy experts, the oil markets will almost certainly face huge deficits that could last for years.
In its March 16 report, the IEA warned of a potential global oil supply shock, with ~3 million b/d of Russian oil production likely to be shut-in in April. The Paris-based watchdog also projects lower demand growth for 2022 by 1.1 million b/d to 2.1 million b/d, thanks to reduced Russian consumption and higher prices. The main reductions in the IEA growth forecast by country were Russia (430kb/d), the U.S. (180kb/d) and China (70kb/d).
However, the EIA is more conservative than the IEA in cutting its 2022 forecast by 415kb/d to 3.13mb/d and increasing its 2023 forecast by 77kb/d to 1.95mb/d. While acknowledging the scale of the potential demand risks, the OPEC Secretariat has maintained its 2022 demand growth forecast at 4.15mb/d.
Meanwhile, commodity expert Standard Chartered has become even more pessimistic about the Russian outlook. In its March 9 report, StanChart lowered its 2022 forecast to 1.94mb/d, nearly a million b/d lower than its February forecast.
StanChart says ongoing sanctions, continuing consumer reluctance to buy from Russia, as well as shortages of capital, equipment, and technology, will continue to depress Russian output over--at least--the next three years. The commodity experts have predicted that Russia's output decline will peak at 2.306mb/d in Q2-2022.
StanChart says that rebalancing the oil markets would require around 2mb/d extra supply for the remainder of 2022, mainly due to the current very low inventory levels, and an additional 2mb/d in Q2 to ease the dislocations caused by the displacement of Russian oil. StanChart's model assumes that the current OPEC+ deal continues, no increase in Iran's exports, and U.S. output growth Y/Y is just over 1.5mb/d.
But here's the main kicker from the StanChart report: only OPEC can bridge the big supply deficit.
StanChart estimates that an Iran deal could potentially provide an extra 1.2mb/d in H2-2022, still leaving a significant gap that can only be realistically filled by those OPEC members with spare capacity, particularly Saudi Arabia and the UAE.
And, prospects for a sharp increase in U.S. shale production are not looking great at the moment.
And, even Biden's latest checkmate is likely to end up being a mere band-aid.
After months of deliberation, the Biden administration has finally authorized the release of an unprecedented 1 million barrels per day from the United States Strategic Petroleum Reserve (SPR) for the next six months.
"The scale of this release is unprecedented: the world has never had a release of oil reserves at this 1 million per day rate for this length of time. This record release will provide a historic amount of supply to serve as a bridge until the end of the year when domestic production ramps up," the White House has said in a release.
The 180mb release appears to come entirely from the US reserve, with the U.S. counting on its allies to release an additional 30mb-50mb of oil from their reserves.
But as Roger Read, senior energy analyst at Wells Fargo Securities, has noted, Biden's planned daily release from the SPR works out to only 1% of daily global production and 5% of U.S consumption.
"I don't want to make it sound like it's nothing, but you just arrive at the issue where we may be off a lot more than just 1 million barrels. So it helps, but it's unlikely to solve the problem. In the end, it's a little bit of a Band Aid and I think a little bit of hoping to get later in the year OPEC catch up," Read has told CNBC.
Additionally, the President has called on Congress to pass legislation designed to incentivize energy companies to drill on public lands, applying a "use it or lose it" strategy. The White House has criticized the domestic energy industry for "sitting on" more than 12 million acres of federal land and 9,000 unused but already approved permits for production.
But it will probably take a lot more to coax higher production from long-suffering U.S. producers.
A recent survey by the Dallas Fed has found that Big Oil intends to grow its median crude production by a mere 6% Y/Y while smaller firms are aiming to expand theirs by 15%.
But it's not all about the money this time around: 41% of respondents believe the WTI price between $80 and $99/bbl is enough to boost production growth; an additional 20% believe $100 to $119 is sufficient, while a small portion said $120/bbl or higher. Nearly one-third of the respondents (29%) said growth would not be dependent on the price of oil.
In fact, ConocoPhillips (NYSE:COP) CEO Ryan Lance says oil prices are so high that "we are encroaching upon the area of demand destruction."
Rather, more than half of the respondents have attributed the restraint in growth to investor pressure to maintain capital discipline, indicating some hard lessons were learned over the past few years.
Given this backdrop, it's not surprising that Warren Buffett has abandoned his well-known investment mantra of being fearful when others are greedy and greedy when they are fearful and paid heed to Sir Winston Churchill's admonition to never let a good crisis go to waste.
A final note: oil stocks remain undervalued, with the S&P energy sector still lagging far behind its 2014 levels from the last time oil crossed $100 per barrel.
Alex Kimani for Oilprice.com