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Jacob Wolinsky
Jacob Wolinsky
Articles  | Author's Website |

Why Did Berkshire Hathaway Signifcantly Reduce its Stake in Exxon Mobil?

Berkshire Hathaway released its most recent 13-f yesterday afternoon. The information revealed unusual activity in Berkshire Hathaway's portfolio during the fourth quarter. There was a lot of buying and selling of various positions.

Overall, Warren Buffett was a net seller in the fourth quarter of 2009. This is hardly surprising since Warren Buffett needed to raise cash to finance the acquisition of Burlington North Sante Fe. Warren Buffett reduced his stake in 11 out of the 41 stocks that are reported in Berkshire Hathaway's 13-F. The companies Buffett reduced his stake in were CarMax, Conoco Phillips, Exxon Mobil, Gannett, Ingersoll Rand, Johnson & Johnson, Moody’s, Proctor & Gamble, Sun Trust Bank, United Health Group, and WellPoint. He added to several positions including one of his favorite companies Wells Fargo.


One of the strangest moves Warren Buffett made was his large decrease in Exxon Mobil. Warren Buffett only acquired a stake in the company during the 3rd quarter of 2009. It is very uncharacteristic of Warren Buffett to trade so quickly especially since there was no significant increase (in fact there was likely a decrease) in the stock price from the time Buffett made the purchase. The move was not insignificant; Warren Buffett reduced his stake in Exxon Mobil by approximately 70%.

The move is extra bizarre because Warren Buffett had initially only purchased a small stake in Exxon Mobil. In the third quarter of 2009 he purchased slightly under $100 million of the company. Warren Buffett never makes transactions of less than 100 million, leading many to suspect (myself included) that he would be buying more stock of the company over time.

I doubt he reduced his stake in Exxon Mobil to raise cash for the BNI deal. He only had a small stake in the company to begin with as I mentioned above. If he wanted to raise cash he would have sold a few more shares of large holdings like Johnson & Johnson and Wells Fargo.

This leads to only two possibilities in my mind: either Warren Buffett is becoming a trader or there was a material change in Exxon Mobil. I highly doubt it is the former and assume it to be the later.


I have thought of two possibilities of why Warren Buffett made this decision and they both have to do with the big news that hit the wires on December 14, 2009: Exxon Mobil was going to buy XTO energy in a multibillion dollar transaction.


The company announced that it would be purchasing XTO energy for $41 billion which includes $41 billion of existing XTO debt. A large part of the transaction would be financed through issuing stock to the shareholders of XTO. Exxon Mobil has agreed to issue 0.7098 of a share of common stock for each common share of XTO.

Exxon Mobil is not exactly over valued currently. A quick analysis of the company shows that it is trading at 9 time’s future P/E, and 6.7 times EBITDA. It seems that Exxon would be better off issuing debt when interest rates are at zero to finance the deal as opposed to issuing more undervalued stock. Warren Buffett is no fan of company buyouts with undervalued stock. The main reason Buffett has been so opposed to the Kraft-Cadbury deal is because Kraft is partially financing the deal with its stock. Warren Buffett believes Kraft to be undervalued and is therefore making a mistake by conducting the transaction with so much stock.


The second reason that I believe Warren Buffett is against the deal has to with the reason Exxon made the offer to buy XTO. According to many analysts the deal is a pure play on natural gas. XTO is one of the largest natural gas producers in the country.

I am not an expert on energy policy but I see two possibilities for the United States getting reducing its dependence off oil and coal in the near future; natural gas or nuclear technology. The United States has a huge supply of domestic natural gas. While natural gas does produce carbon emissions, it produces far less than oil or coal which currently the United States is heavily dependent on. It would be an alternate energy source for the country at least in the near future.

Nuclear power produces zero emissions; however there are many cons about nuclear technology which I will not get into now. Lately it looks like the Obama administration is taking the Nuclear power route to make the country more energy independent. For the 2011 budget, President Obama proposed y issuing over $54 billion in loan guarantees to expand nuclear power and reduce carbon emissions. In fact Obama recently issued $8 billion loan guarantees recently for two nuclear plants to be built in the Georgia (although this action happened after Buffett’s sale of XOM, maybe Buffett saw this coming especially since Obama consults with him on economic policy from time to time). This is a significant move since this could lead to the first nuclear plant being built in America in over three decades.

This is very bad news for natural gas (and other energy sources). If Obama stresses nuclear power while simultaneously Exxon Mobil is hedging its future on natural gas, XOM is in big trouble. This is not a small bet by Exxon Mobil. The company has proposed a deal worth tens of billions of dollars that is an all in play on natural gas. Maybe, this is another reason why Warren Buffett aggressively sold so much stock in Exxon Mobil.

Disclosure: long Brk.B, XOM, IR, WLP, COP, WFC and PG

I give Credit to Guru Focus columnist Ravi Nagarajan of rationalwalk.com for pointing out the sale of Exxon Mobil by Warren Buffett.

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


Rating: 3.1/5 (29 votes)

Comments

benethridge
Benethridge - 7 years ago    Report SPAM
Great article. Thanks!
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
Thanks ben

Im wondering if anyone else has any thoughts on this seemingly strange move by Warren Buffett?
jrhubbard
Jrhubbard - 7 years ago    Report SPAM
These are almost certainly Lou Simpson buy/sells, given the size of the transactions. Many of the smaller positions that "Buffett" is listed as holding are his - for instance, the health insurers - Wellpoint and UnitedHealth. Someone else could elaborate. I don't keep a very close eye on their equity holdings; I have gained a certain degree of trust by now... ;)

yswolinsky
Yswolinsky - 7 years ago    Report SPAM
In response to the previous comment someone who I would consider an expert on Berkshire emailed me the following comment.

One other possibility I considered is that Buffett may not be the one making the decision on this one ... as you mention in your article, the position size is small. Maybe it was Lou Simpson? However, from the 13F, this appears to not be the case given that the manager ID associated with the XOM position is Warren Buffett (No 4).
ustaad
Ustaad - 7 years ago    Report SPAM
If I had to guess, the investment in XOM (and COP as well) was a hedge against significant increase in the price of oil. At a firm with substantial interests in manufacturing and transportation, rising fuel costs can hurt business results. So, the natural thing to do is to purchase a position which can earn a decent return if oil never reaches $100 and can benefit spectacularly from persistent and high oil prices.

The position was small because he doesn't yet anticipate that inflation will be a huge problem.

Once he had the BNI deal under wraps, he had the perfect inflation hedge, one that wouldn't be hurt by windfall profit legislation or impacted by the populist tirade against profits at oil companies, hence the wind down.

yswolinsky
Yswolinsky - 7 years ago    Report SPAM
Great analysis. I did not think of the inflation factor.

However one flaw in the theory is that Buffett was selling COP way before the BNI deal was proposed Where was his inflation hedge then?

But overall I like your theory. Great comment

wwww.valuewalk.com
crafool
Crafool premium member - 7 years ago
Buffett is not the only investment manager for BRK. As correctly noted previously by Jrhubbard, there is Lou Simpson and BRK has handed out a couple of Billion (Around 1 Billion to each) to a few select and secret managers to handle that are in Buffett's mind for possible successors to him for the investment aspect of BRK. I generally practice that any BRK purchase under $250 million is not him, but one of the proteges. Doesn't mean those are purchases to avoid, because if Buffett likes you then you can't be half bad. I would bet the manager of Bill Gates' Cascade investments is one of the proteges as well as one of the guys at Sequoia ( Bill Ruanes' old firm) and one of the Bryne kids (Father ran GEICO previously and Buffett used to call him the "Babe Ruth" of Insurance) who used to run a hedge fund that BRK was invested in. The only time that small purchases showed up and stayed small that Buffett made in the last few years was his move into Pharma (i.e. Sanofi and Glaxo).

Hope this helps.

Happy investing to all.
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
crafool please see my previous comment where I addressed that issue.

http://valuewalk.com/
ustaad
Ustaad - 7 years ago    Report SPAM
I don't have a grat explanation for this seemingly at-odds move. However, let's look at the context here. In 2002 and 2003, Buffet bought a stake in PTR for $500 Million (oil was roughly south of $30 a barrel then). In 2006, Buffet initiated a position in COP for about $1 Billion (oil in $40-$50 range per barrell). In 2007, Buffer sold his PTR stake for $4 billion (oil at $70 per barrel). By his own admission, Buffet sold PTR when the valuation gap between PTR and other oil majors dissappeared. Then in 2008, he bought his remaining stake in COP (spending over time approx 6.5 billion, but for the first couple of years the stake was relatively modest at $1 billion and change). At that point in time COP was a relative bargain compared to XOM or CVX. It might also be worth noting that Buffet didn't try to buy CVX (likely due to refining margins coming under pressure at high oil prices and also due to the international partnerships that carried significant political risk).

With this background, the question is: why did he sell COP. The most obvious reason of course is that inflation risk was probably the farthest from anyone's mind at that point and he did realize a significant short term tax loss. I think a second reason is the COP acquired assets when oil prices were at a record high while XOM sat it out, really highlighting XOM as being the better capital allocator. With oil prices having swooned and COP looking to trim its size to compensate for poor capital allocation, it made sense to exchange the cash rich XOM for the COP stake.

In summary, both provide hedging benefit from high oil prices. When he first bought COP, it was cheaper of the two but made some capital allocation mistakes and carried some political risk. Last year, both were trading (very roughly) at similar discounts to fair value. XOM was simply the better business and in the exchange, he got the tax loss for free (pun intended).

yswolinsky
Yswolinsky - 7 years ago    Report SPAM
I forgot to add in my article that maybe this is why Buffett stopped reducing his stake in NRG. NRG is interested in building nuclear plants, maybe this is why Buffett did not sell any NRG in Q4 as he had in previous quarters.
benethridge
Benethridge - 7 years ago    Report SPAM
Could this selling of oil-related stocks also have to do with the coming of plug-in electric cars? As I recall from a Buffett interview, he's been tracking that automotive sea change.

NRG would be synergistic with that, IMHO.

Ben
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
COP we cant speculate about because he said he paid too high a price (although I think it is undervalued), however that could be the case with exxon.

Buffett has made a huge profit on BYD and has still not sold.
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
However like I said in the article Exxon seems to be staking its future on natural gas. This could be good move because we have huge deposits of natural gas.

This could also be prudent because soon when the populist masses get bored of hating the banks, they will go back to their old enemy- big oil.

http://valuewalk.com/
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
From WSJ

A nuclear-power venture owned by NRG Energy Inc., Toshiba Corp. and a Texas utility resolved a legal dispute Wednesday that allows one of the first new U.S. nuclear-power projects in decades to proceed.

The agreement, between the joint venture, Nuclear Innovation North America, and San Antonio municipal utility CPS Energy, reduces the utility's stake in the south Texas nuclear power project to 7.6%, from 50%, with the joint venture retaining 92.4%, according to CPS and NRG.

The agreement ends a $32 billion lawsuit that CPS filed in December to reduce its participation in the project, and allows ...

benethridge
Benethridge - 7 years ago    Report SPAM
BYD, the gaming company?
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
No it is a car company based in china
benethridge
Benethridge - 7 years ago    Report SPAM
Ah, then to my point earlier, apparently he's been doing more than just "tracking" it. :-)

http://money.cnn.com/2009/04/13/technology/gunther_electric.fortune/

Ben
bmichaud758
Bmichaud758 - 7 years ago    Report SPAM
The over analysis of Berkshire's equity movements is stunning. First off, Buffett obviously does not trade in millions save his personal portfolio, he trades billions (like others have said it was most likely a move at Geico, etc...). Secondly, Buffett does not try to hedge inflation risk and trade in and out of companies based on potential moves in Washington (i.e. nuclear v. natural gas).

The merger with XTO is a fair price and the combined company will have proforma EBIT per share (based on LTM EBIT for both companies) of around $7.00 and proforma net debt of around $1.00 per share. This is a highly strategic deal for XOM that will reward shareholders for years to come.

If everyone sits back and looks out 5 to 10 years and forgets about the short term portfolio moves of managers that give no insight to their positions other than SEC filings, this is a wonderful company selling at a substantial discount to its long term intrinsic value.
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
It seems it was Buffett who made the trade. See above

And if it is such a wonderful company why did he sell it
Knowledge
Knowledge - 7 years ago    Report SPAM


A couple of scenarios:

1. Most probable, Buffett raised cash for BNI by selling out of positions that will likely be in the same price range for months or longer. This is similar to what he seemingly did with JNJ, etc. when he provided cash to GS and GE.

2. One of the other managers changed focus and switched into something that was more undervalued.

3. Possibility that Buffett got outside his circle of competence when he bought into oil majors. He has stated as much by admitting that he bought COP significantly when oil was headed to its highs. He sold some COP to harvest tax losses but refrained for a quarter. Could he have resumed selling after rethinking oil price history? Oil is still 2-3x where it was only 6-7 years ago and these companies earnings reflect the massive jump in the recent prices. If the dollar strenghtens and when Iraq gets back on-line (4 of top 5 fields worldwide), who's to say what the price of oil will be. That's a lot of uncertainty.

Just my thoughts because I'm puzzled too.

yswolinsky
Yswolinsky - 7 years ago    Report SPAM
1. if he wanted to raise money selling a few shares of exxon would not be the best way he should have sold more of JNJ. I raised the issue in my article

2. I addressed that issue with a comment from an email I received.

3. You could be right about the oil issue but it still is uncharacteristic of Buffett

Thanks for the analysis
Knowledge
Knowledge - 7 years ago    Report SPAM


What puzzles me is, being that it is a relatively small investment for Berkshire, why wouldn't he just sell the whole thing?
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
I also wonder that why reduce the stake by 70% but not 100%. This whole thing is really puzzling.
benethridge
Benethridge - 7 years ago    Report SPAM
Maybe he finally went senile on us. :-)
bearuo
Bearuo - 7 years ago    Report SPAM
Thank you all so much for the great article and followup discussions. Keep them coming! Investing would be too dull, boring, and serious otherwise.
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
Are you being sarcastic because I have written articles about investing, and not to brag but my articles are among the most popular on the site
bmichaud758
Bmichaud758 - 7 years ago    Report SPAM
Lot's of money managers sell wonderful businesses to buy other wonderful businesses. Bill Ackman sold his entire McDonalds stake in the latest quarter - does this mean MCD is not one of the greatest companies in the world? Of course not - if an investor took a 5 to 10 year perspective, he/she would be a LOT richer in the next decade if they loaded up on MCD. Ackman's sell does not undermine these prospects. Bruce Berkowitz recently sold a majority of his PFE stake - bad company, poor prospects? Absolutely not - he just decided to go elsewhere.

Exxon Mobil is selling at an extremely attractive level considering where the country is headed in terms of inflation and commodity prices. The major risks to oil/commodity plays are deflation and a sea change in energy consumption. With regards to deflation, the U.S. private sector is backed by the full faith and credit of the U.S. printing presses - barring the printers running out of ink, the risk of deflation is nil. Regarding a change in energy consumption, it is going to take YEARS for the clean energy movement to supplant oil and coal. For the sake of my personal monthly budget I hope I am wrong, but once the global economy is up to full speed over the next decade, I believe 2008 oil prices will be a distant dream. The emerging world has enormous growth potential and wind/solar energy simply cannot support that growth.

As a stand-alone company, XOM is moderately undervalued based on 2009 earnings. However, if one believes XOM can reach its 2006 to 2008 earnings power going forward, it is a 50-cent dollar. With the addition of an undervalued natural gas play, it starts to become a 40 to 45-cent dollar.

I put my money where my mouth is prior to the acquisition and continue to add to my position as the merger arbs short XOM down to even more attractive levels.

And Wolinsky, thank you for providing so many effective launching pads for lively discussions. Where would we be without your articles?!!!?
benethridge
Benethridge - 7 years ago    Report SPAM
Well said.
Knowledge
Knowledge - 7 years ago    Report SPAM
Bmichaud758,

I agree with your post in general. My only concern is that XOM's earnings during 2006-2008 represent a massive increase in the oil price. For decades, oil consumption grew without these kind of increases in oil pricing. If oil returns to normal levels, do XOM's earnings return as well? Look at their 10-year history on Value Line for EPS...they were significantly lower. As a business, XOM will be fine and make money but not quite as much; and, therefore, maybe now is not the best time to buy.

Just a thought.

bmichaud758
Bmichaud758 - 7 years ago    Report SPAM
Guru93,

I would agree with that concern. If XOM earns materially lower than what it did in 2009 going forward, I may not break even on my investment - a risk for sure.

However, if you subscribe to the view that we are entering a period that rhymes with the 1970s, I believe there is a floor under the price of oil and commodities in general. I have no idea what is in store for the economy or financial markets in the next day, week, month, or year, but what I do know is that the conditions are set for higher interest rates and higher inflation over the next five to ten years.

The government can shrink its debt load via lower spending, robust economic growth, or inflation. I do not believe the government (republicans and democrats alike) has the wherewithal to restrain spending and/or achieve a budget surplus (especially with baby boomers retiring over the next ten to twenty years). As far as economic growth is concerned, not independent of the government's inability to remove itself from the private sector, I believe the Bill Gross/PIMCO "New Normal" thesis is unfortunately a rather accurate outlook for the foreseeable future. With robust economic growth and fiscal responsibility off the table, inflation is the only viable way to manage/reduce the debt load going forward. As inflation sets in, commodity prices will trend upward as the dollar depreciates against stronger currencies.

There is always the risk the government could become fiscally responsible and/or adopt pro-capitalist policies which would lead to materially lower commodity prices and an overpriced Exxon Mobil. I hedge this risk though by buying XOM which operates well even in a flat price environment versus an Occidental Petroleum which is heavily tied to the price of oil.

Hope this helps.

Knowledge
Knowledge - 7 years ago    Report SPAM
Thanks for taking the time to add more color to your comments. I think the odds are with your view but Buffett usually claims not to play 'macro' conditions. But that could mean stock market prices only and not what may work best in a particular environment (inflationary)...then again, that favors holding XOM and he sold!
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
Guru if XOm's earnings were inflated 06-08 that would explain the selling but why the buying, Besides oil prices were pretty high from 03-06 and 03-08

I am also curious why Buffett is buying all these commodity companies if you like for moats commodity companies do not really have it. McCdonalds and Caterpillar both have much larger moats than COP or XOM and CAT was trading ridiculously low in March I bought in a 24 and sold at 70. MCD wasnt as cheaply priced but it does not seem more expensive than KO.
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
Thanks for all the votes supporting me. and BTW bear if this topic is so boring why were are there so many comments on it?

I think we are all having an interesting discussion here, otherwise there would not have been nearly as many responses.
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
wow I have never seen so many votes on comments. Where are all these votes coming from?
benethridge
Benethridge - 7 years ago    Report SPAM
?? I don't know. I just put in my one. Maybe ask gurufocus if they think they're real or bogus. Maybe they have a way of tracking who votes.
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
You guys might be on to something Buffett is conducting a three hour interview with Becky Quick next Monday
gurufocus
Gurufocus premium member - 7 years ago
Votes are IP unique, therefore we believe those votes are real.
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
Well then thank you all

http://valuewalk.com/
FreeStateYank
FreeStateYank - 7 years ago    Report SPAM
Thanks for the thought provoking article. I purchased a considerable block of xom after a large dip. Sadly, I didn't catch the knife before it was done dropping, and I am down 4.5%.

However, I believe the fundamentals [I know, nobody cares about them these days!] for xom are good.] They produce more cheaply than anyone else and are diversifying into gas which seems a good thing for US energy as well as a potential export market.

Furthermore, they've picked up some gas fields in Poland. I think there is some major chess-piece movement going on around the board and quality companies are positioning themselves to be less dependent on those countries that are, er, problematic.

Lastly, I have no interest in buying bonds- who wants to hold more debt? FRN's are up a bit currently, but with the spendfest going on, that isn't likely to last. Even if we're the best of fiat currencies, I believe that commodity related equity is a safer bet. The thing is, XOM pays a poor dividend comparatively. Thus, if the stock stays flat, at least with BP at 6% or CVX at 3.5% one gets a better return for holding. That factor, in this uncertain time, is what makes me think that XOM has dropped lower than perhaps it otherwise would have done.
AlbertaSunwapta
AlbertaSunwapta - 7 years ago    Report SPAM
Maybe Buffett thinks there's too much technological risk to the margins of XOM :-)

My view is that gov'ts are going to go after oil in a big way to pay off their deficits and fund alternate energy development, improving security of supply, fight global warming, etc.
yswolinsky
Yswolinsky - 7 years ago    Report SPAM
Of course. Like I said earlier after people get tired of accusing Goldman Sachs of doing the work of the devil, the big oil companies and Walmart will come back as public enemy #1. But that does not explain why he purchased it in the first place
chu082011
Chu082011 - 4 years ago    Report SPAM


I don't have a grat explanation for this seemingly at-odds move. However, let's look at the context here. In 2002 and 2003, Buffet bought a stake in PTR for $500 Million (oil was roughly south of $30 a barrel then). In 2006, Buffet initiated a position in COP for about $1 Billion (oil in $40-$50 range per barrell). In 2007, Buffer sold his PTR stake for $4 billion (oil at $70 per barrel). By his own admission, Buffet sold PTR when the valuation gap between PTR and other oil majors dissappeared. Then in 2008, he bought his remaining stake in COP (spending over time approx 6.5 billion, but for the first couple of years the stake was relatively modest at $1 billion and change). At that point in time COP was a relative bargain compared to XOM or CVX. It might also be worth noting that Buffet didn't try to buy CVX (likely due to refining margins coming under pressure at high oil prices and also due to the international partnerships that carried significant political risk).

With this background, the question is: why did he sell COP. The most obvious reason of course is that inflation risk was probably the farthest from anyone's mind at that point and he did realize a significant short term tax loss. I think a second reason is the COP acquired assets when oil prices were at a record high while XOM sat it out, really highlighting XOM as being the better capital allocator. With oil prices having swooned and COP looking to trim its size to compensate for poor capital allocation, it made sense to exchange the cash rich XOM for the COP stake.

In summary, both provide hedging benefit from high oil prices. When he first bought COP, it was cheaper of the two but made some capital allocation mistakes and carried some political risk. Last year, both were trading (very roughly) at similar discounts to fair value. XOM was simply the better business and in the exchange, he got the tax loss for free (pun intended).



Hi,

Thank very much for your comment. It help me to think about for my ideals.

Apart from that, you also can ref more resources at: Berkshire Hathaway interview questions

Tks again and pls keep posting.

Please leave your comment:


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