Why Did Warren Buffett Buy Chevron?

A closer look at this recent trade

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Rupert Hargreaves
May 06, 2021
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According to the group's latest 13F filing at the end of 2020,

Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) has begun building a position in oil giant Chevron (CVX, Financial). It owned just under 48.5 million shares in the company as of the fourth quarter, worth an estimated $4.1 billion. This was one of the most significant positions in Berkshire's portfolio at the end of the year.

Why did Buffett buy Chevron?

Buffett's decision to acquire such a substantial investment in an oil company struck many as strange considering the mixed outlook for the oil industry. One shareholder wanted to know more about the position at Berkshire's latest annual meeting, which was held this past weekend.

The shareholder likened oil companies to the tobacco businesses, noting that in 1997, when Buffett was asked if he would ever invest in tobacco, he said he wouldn't because he was uncomfortable about the industry and its prospects. The investor wanted to know if one could still assume that oil and gas companies "can generate a sufficient return on capital for a long time to come?" considering the shift away from hydrocarbons towards renewable energy.

Buffett started his response by revisiting the tobacco question. He said that Berkshire has "no problem owning Costco (

COST, Financial) or Walmart (WMT, Financial)," even though selling cigarettes is a big part of each company's business model. However, deciding where to draw the line is a "very tough" question.

The Oracle of Omaha added that "a long time ago," an opportunity came up for Berkshire to acquire a chewing tobacco business. It was a desirable enterprise. "Charlie [Munger] and I did go down in the lobby of that hotel, and we just said to ourselves, this is probably the best business we've ever seen," he said, referring to the opportunity. Ultimately, Buffett and Munger didn't feel right about investing in that particular business.

What is right and what is wrong

Drawing the line between what is right and what is wrong is challenging, Buffett proclaimed. He said that in the past, some of his newspapers had carried ads from "financial companies where I knew they were terrible." With regard to Chevron, and whether or not the company benefits society, Buffett stated:

"I think Chevron's benefited society in all kinds of ways and I think it continues to do so, and I think we're going to need a lot of hydrocarbons for a long time and we'll be very glad we've got them, but I do think that the world's moving away from them, too, and that could change."

The problem with making moral judgments on stocks, Buffett went on to opine, is that there's "something about every business you wouldn't like." He gave the example of meatpacking plants, which most people wouldn't put in the same bracket as tobacco and Big Oil, but some people might not like what goes on inside these facilities.

While Buffett didn't give a definitive answer to the question of whether or not he thought oil companies will still be making good returns on capital 10 years from now, he did add:

"Chevron's not an evil company in the least, and I have no compunction in the least about owning Chevron. And if we own the entire business, I would not feel uncomfortable about being in that business."

This statement is quite a telling look into Buffett's thoughts. After more than seven decades in the business of investing, Buffett knows more than just about anyone how brutal the world of business can be. He knows some companies ultimately won't survive, and the only way for organizations to prosper year after year is to invest and plan for the future.

His comments seem to suggest that he believes Chevron will deal with whatever the world throws at it, and that's more important than trying to figure out how the oil industry will evolve over the next few decades.

Disclosure: The author owns no share mentioned.

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