The oil and gas sector has been one of the worst-performing segments of the stock market over the past few weeks.
Economic growth concerns over the new coronavirus have combined with the falling price of oil as countries ramp up production to compete for market share, and these two factors have weighed heavily on the share prices of oil and gas companies.
A value sector
A handful of value investors have been buying oil and gas stocks over the past few quarters. For example, Warren Buffett (Trades, Portfolio) made a substantial investment in Occidental Petroleum (OXY, Financial) last year to help the company fund its acquisition of Anadarko. Carl Ichan also bought shares of Occidental, although for different reasons.
Seth Klarman (Trades, Portfolio), Maverick Capital and Sam Zell have all also been cited as being energy sector bargain hunters by those with knowledge of their investment goals.
All things considered, I believe there's a good chance Buffett could come back to buy more energy stocks, considering where the sector is at today.
Buffett on energy stocks
At the 2015 Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) annual meeting, a shareholder asked Buffett about the energy sector. Citing the Oracle of Omaha's previous energy sector acquisitions, the shareholder asked Buffett if he would ever consider buying energy stocks again. Buffett gave the following response:
"As it turned out, we wrote ConocoPhillips (COP, Financial) down because we were required by the auditors to do it. We actually, by the time we got all through, we made some money in it, and we made a little money in ExxonMobil (XOM, Financial), too. But we will not be buying, very often, oil and gas stocks, but we will — we probably haven't bought the last one. In the end, we look at the cash, we look at available opportunities, both in investments and businesses, and we make decisions, occasionally, on buying something and sometimes we change our mind. And that will continue that way. It's been going on that way for a lot of years. And we have not distinguished ourselves, at all, in the oil and gas field, although we've made a little money, and we passed up one or two where we could have made a lot of money."
For some background, Buffett invested about $7 billion in shares of ConocoPhillips just before the financial crisis. His paper loss on the investment reached $2.6 billion at one point. Buffett said that he was happy to increase his exposure to energy stocks if they provide the right risk-reward ratio.
He then handed the microphone over to his right-hand man, Charlie Munger (Trades, Portfolio), who provided some further insight into to the Sage of Omaha's way of thinking:
"Yeah. And with interest rates being so low and the dividend on ExxonMobil being the size it was, it was not a bad cash substitute, if you think only in those terms."
Yields are attractive
Berkshire acquired its stake in Exxon in 2013. Considering the development of interest rates and the company's dividend over the past seven years, it seems as if the appeal of the stock has only increased from Munger's perspective.
At the time of writing, the stock supports a dividend yield of 8%. That is excluding any additional returns through price appreciation. Other big oil companies offer similar levels of income for shareholders. Chevron (CVX, Financial), for example, currently supports a dividend yield of 6.1%, while BP (BP, Financial) yields 9.4%.
Considering the Oracle of Omaha's comments in 2015, it looks as if these low valuations and high yields could attract his attention. With Berkshire's $130 billion cash pile earning little to no interest in the bank, a dividend yield of 8% or more could be too good to pass up.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Warren Buffett: Why GEICO Outperformed in 2009
- Warren Buffett and Seth Klarman: Ignore Book Value Cost
- Howard Marks: Look for Select Bargains, but Beware of Further Declines
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