Warren Buffett Bets $6 Billion on Energy

Combined, Berkshire Hathaway and Warren Buffett have invested a total of $6 billion in Phillips 66, Conoco Phillips, National Oilwell Varco and Exxon Mobil. When added together, these investments make up 8% of the total of Berkshire Hathaway’s portfolio. When combined, they make up the fifth biggest investment in the portfolio, where they trail the big four investments in Coca-Cola, American Express, IBM and Buffett favorite Wells Fargo.

In North America, demand is falling. This is an excellent sign for a number of reasons, including: First, when tied directly into international demand growth, this will increase the total amount of production that will be exported, and this is a boon to overall domestic employment. Next, it can also have massive benefits for the domestic economy if it swings from being a net importer to becoming a net exporter.

Mexico and Canada also have a capacity for production in much greater excess of domestic demand, which plays directly into several companies’ strengths, and this especially includes Exxon Mobil and Conoco Phillips. There is also a great deal of upside because of Mexico’s expansion in private investment in its gas and oil production. This will help a supplier company such as National Oilwell Varco. The demand worldwide for flexible and cheap fuel is going to continue to grow for decades, even as natural gas and other alternatives like electric vehicles become more viable options, and when engines of a traditional nature become even more efficient.

Out of everything, population growth is the main key driver of everything. This is going to continue to put more pressure on producers in order to feed the addiction that the world has for oil.

Let’s Speak about Mexico

Conoco Phillips and Exxon Mobil are the two biggest oil producers that will most likely benefit the most from the market opening up. Exxon Mobil is currently the largest producer of natural gas in the United States, and has a tremendous amount of experience in offshore fields like the Julia Field in the Gulf of Mexico, as well as shale exploration. Pemex – the state oil company of Mexico – could use this kind of help in order to maximize their resources.

Conoco Phillips will continue to expand its deep water productions throughout the Gulf of Mexico, and it even announced last week that it has discovered another large reserve in the Gulf, making it the fourth already this year. The well depth is more than 29,000 feet, which leaves it under 4900 feet of water. Conoco Phillips expertise in this particular area could also be attractive to Mexico’s state oil company, as they begin to expand offshore production.

It All Comes Back to Growing Global Demand

A few months back, Warren Buffett chose to reduce Berkshire Hathaway’s stake in Conoco Phillips by a significant amount. If you tie that into Berkshire Hathaway’s recent announcement saying that they are going to acquire Phillips 66’s Phillips Specialty Products really points this out. The potential Conoco Phillips investing risk is that, as a production and exploration company, the price of gas and oil (of which oil companies do not control) can have a major impact on the profitability of the company. On the flipside, the PSPI chemicals aren’t nearly as affected by the ups and downs of the market and the price of oil, but Buffett can still receive the benefit of the increasing energy demands.

In all honesty, the move Buffett made in lowering his position in Conoco Phillips by cutting it in half, coupled with the move to use the majority of Berkshire Hathaway’s Phillips 66 shares in order to acquire PSPI, are likely the result of Berkshire looking to limit the potential falling oil prices downside, if they were to occur within a few years. But it also gives them exposure to energy demand and the long-term growth that it provides.

The Largest Falling All Oil Prices Hedge?

The National Oilwell Varco nickname “No Other Vendor” rings true and puts the company in an enviable position. They offer a wide variety of diverse products and services that fully cater to the gas and oil industry. There is no other company in the world that offers so many and so much, and it has very little direct competition. Even though NOV shares have underperformed the market since 2010, there’s plenty of reason to be positive about the company’s future.

For starters, they have long-term results under matched by anyone else in this field. An investor that held their shares for any five-year period since the year 2000, with the one exception being the period of 2008 through 2012, have even outperformed the S&P 500. And for those investors that purchased during 2008, the business’ history of very strong long-term earnings growth points to outperforming the market once again. This is especially true when you consider the following:

Unlocking Shareholder Value

In September 2013, National Oilwell Varco said that it have plans to spin off its distribution business, named DistributionNOW, and will distribute the shares to the shareholders of NOV in a tax-free way. When the spinoff of the company is complete, current company leader Robert Workman will eventually become the CEO. Workman has been working at National Oilwell Varco since 1991, and he’s even headed up the distribution business since 2001. He grew this business to more than $4 billion in annual sales through acquisitions and organic growth. In 2002, their annual sales were less than $700 million. So it’s obvious that he’s done a tremendous job at his post.

This spinoff is going to simplify a very complex company that already has many divisions and a lot of moving parts. It will allow both entities to function and grow better. The overall final result will be two companies that will be more valuable as separate entities than as a single company in NOV.

Final Thoughts

Since roughly 10% of Berkshire Hathaway’s portfolio is in gas and oil, it would make sense for some investors to have exposure to this segment of the market. The big advantage to following Buffett – other than his incredible track record – into a company is knowing that he and Berkshire Hathaway invest for the long term. When it comes to other managers, this is not necessarily the case. If you want to buy and hold a stock for years, every one of the companies in the Berkshire portfolio has tremendous long-term benefits and a unique advantage. Do they make sense for your portfolio? Only you can decide.