Warren Buffett (Trades, Portfolio) has built a significant position in oil producer Chevron Corp. (CVX, Financial) via his conglomerate, Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial).
Indeed, at the end of the second quarter, the guru's stake in Chevron was worth around $23 billion, making it a top five position in the equity portfolio.
This is particularly impressive as the Oracle of Omaha only started acquiring the position in the third quarter of 2020, according to 13F filings with the SEC. He has aggressively increased his holdings of the oil major over the past two quarters.
Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
The company’s strengths and weaknesses
At first glance, this might seem like a bit of an odd position for Buffett. Traditionally, he has avoided companies with exposure to the resource sector, preferring instead to buy consumer goods and financial stocks - companies with a strong competitive advantage and that do not rely on commoditized products.
This means they can increase the cost of the goods and services in line with sales, producing a more stable return for investors over the long run. Commodity companies cannot do that. They are always beholden to commodity prices, which is why Buffett has avoided them in the past.
However, when it comes to Chevron, I think it is a mistake to focus too much on the company‘s exposure to oil.
Yes, Buffett might believe oil is undervalued and unlikely to be replaced as one of the world's major fuel sources anytime soon. But at the same time, Chevron has some very valuable resources in the form of its downstream operations.
Downstream operations such as refineries are not as exciting or profitable as upstream production assets, but are a vital part of the global energy ecosystem. Refineries not only turn basic crude oil into fuel that is used for different vehicles, but they also turn hydrocarbons into other products, such as plastics and lubricants.
While the world is moving away from hydrocarbons, it seems unlikely there will be any significant shift away from oil as a major component of things such as plastics, lubricants and fuels for the next couple of decades. The infrastructure just is not there.
At the same time, increasingly stringent environmental regulations and controls are making it harder for operators to build and expand existing downstream facilities.
According to the U.S. Energy Information Administration, the newest refinery in the U.S. was opened in February with the capacity to refine 45,000 barrels of crude oil per day.
However, the last facility to open with significant capacity was in 1977. Initially opened with a capacity of 200,000 barrels of oil per day, it has since been upgraded to deal with 585,000 barrels.
Overall global refining capacity declined by around 1% in 2021, though global petroleum and other liquid fuel consumption increased by about 2%.
Stable income from valuable assets
Refining is the real story behind Chevron.
The company has a huge refining footprint and is in a unique position to capitalize on a market that is becoming tighter every year. While oil prices can be volatile, refining margins can be relatively stable.
When coupled with the group's global midstream and trading assets, it has a strong competitive advantage and predictable recurring revenue stream from downstream assets.
After taking into account this competitive advantage, the stock appears cheap. It currently trades at a 2022 forward price-earnings multiple of just 8.40.
It also offers a dividend yield of 3.6%, and the company has a track record of returning cash to investors with share repurchases as well.
So in many ways, this business does look like a typical Buffett stock. It has a strong competitive advantage and appears cheap. That is without taking into account the company's track record of returning cash to investors.
