At the end of 2020, Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) disclosed a sizeable stake in oil giant Chevron (CVX, Financial). The corporation had previously been allowed to keep this position secret while it accumulated a substantial number of shares.
At the end of the fourth quarter of 2020, the conglomerate owned 48.5 million shares in the oil giant, up from 44.3 million shares at the end of the third quarter.
The Chevron purchase was likely orchestrated by Buffett himself, who oversees the company's huge equity portfolio. The size of the position makes it less likely that it would have been one of his portfolio managers that initiated the holding.
Not a typical Buffett investment
The purchase seemed strange when it was initially announced. The Oracle of Omaha has generally stayed away from commodity companies over the past couple of decades. He believes that the best way to value a business is to analyze its cash flows from now "until Judgement Day," which is pretty tricky to do when those cash flows depend on a volatile commodity like oil.
Still, at the time, the business looked appealing from a value perspective. The stock was trading at a single-digit earnings multiple and had one of the strongest balance sheets in the industry with a 5.6% dividend yield. The company also has a strong position in the chemicals and refining markets, giving it an edge over other oil producers and diversification.
As it turns out, this trade was incredibly well-timed. The price of Brent crude oil has surged to a nine-year high as the war between Russia and Ukraine disrupts energy markets.
As oil prices have charged higher, analysts have rushed to upgrade their projections for the company. This time last year, Wall Street was expecting the company to earn around $6.30 per share for the 2022 fiscal year. Today, analysts are projecting earnings of $11 per share, and this figure could rise further if the oil price remains elevated.
Unfortunately, Buffett decided to substantially reduce Berkshire's investment in Chevron in the first quarter of 2021. After the stock rallied from around $70 to more than $100, the corporation dumped 50% of its position, so it hasn't benefitted from much of the stock's gains since then.
Short-term trades
It's unclear why Buffett made this move to reduce the Chevron position. Around the same time, Berkshire also seems to have instigated several short-term trades in biotechnology companies and reduced its position in Apple (AAPL, Financial).
The Chevron holding fell to around 23 million shares before the Oracle seemed to reverse course again. He increased the position to 38 million shares in the fourth quarter of 2021, according to the 13F report.
Maybe Buffett realized he had made a mistake. That is entirely possible. Oil prices started rising significantly in the second half of last year, and they have continued to rise ever since. From an initial purchase price of around $70, the stock is now trading at more than $150. Berkshire initially spent $4.1 billion buying its Chevron holding. If it had held onto the position in its entirety, it would be worth more than $8 billion today and would be a top-10 position for the corporation.
Following the company's recent performance, this is going to be a large position for Berkshire no matter what. And I think Buffett's involvement is already impacting the company.
Towards the end of last year, it announced a substantial share repurchase policy, Buffett's preferred way of returning cash to investors. In the last week, it has hiked its repurchase target. The company now expects to buy back between $5 billion and $10 billion of its shares every year, up from $3 billion to $5 billion before.
Alongside this announcement, Chevron's CEO Mike Wirth noted that the firm is "aiming to grow cash flow and return more of it to shareholders." This sort of declaration is music to Buffett's ears.
