Why is Warren Buffett so bullish on the oil sector?

Some call Warren Buffett of Berkshire Hathaway the last bull on oil but that is a trend that cannot be missed. For the first time in recent memory, Buffett has more than $45 billion invested in oil stocks, predominantly in Chevron and Occidental Petroleum. As of the close of the June 2022 quarter, Berkshire Hathaway, the investment vehicle of Warren Buffett, owns close to 18.7% stake in Occidental Petroleum. However, most investors find it rather surprising to see Buffett so bullish on oil, when the world is moving towards green tech.

What is more, in the recent dips in the oil stocks, Buffett has used the corrections to buy more of these stocks. Recently, Occidentally stock prices had dropped by 15% in June amidst a sharp fall in global crude prices. However, Buffett used this dip as an opportunity to buy more of the stock. In just 2 days recently, Berkshire Hathaway bought shares of Occidental Petroleum to the tune of $698 million. As of the latest filings with the SEC, Berkshire Hathaway owns about 175.4 million shares in Occidental Petroleum worth $11 billion. 

The energy sector had taken a beating recently as oil prices fell below $100 a barrel, impacting the stock prices of most of the oil producers. The fall in oil prices from a peak of $139/bbl to $95/bbl is largely on account of recession fears in Europe which is likely to dent oil demand. In addition, the recent data has also shown a sharp spike in the US stockpiles as reported by the American Petroleum Institute (API). So, oil is pricing in a glut of oil stocks, recession fears and a slowdown in economic growth. That explains the sharp fall in oil.

But Buffett has hardly bene daunted by the vagaries of oil prices and is expecting the last hurrah of the fossil fuel companies to last much longer than originally anticipated. But, Occidental is one of its two key holdings in oil, the other being Chevron. Buffett’s holdings in Chevron is more than $29 billion. Incidentally, Chevron is the fourth largest holding in the Berkshire equity portfolio after Apple, Bank of America and Coca Cola. That makes up for an oil portfolio worth $45 billion in the portfolio of Berkshire Hathaway.

Buffett has traditionally been a value investor rather than focusing on growth or momentum. Obviously, their belief is that oil as a commodity may not reprice much but oil companies have a lot of value catching up to do. According to Buffett, which owns several oil companies in its portfolio including Chevron and Occidental Petroleum, there is an element of margin of safety in the oil sector. In the recent dip, Berkshire Hathaway has aggressively built up stakes in several oil companies. 

However, Buffett has been bullish on oil for some time now. He first started buying shares of Occidental Petroleum in 2019. He had funded Occidental’s acquisition of Anadarko Petroleum Corporation through the issue of preferred stock. The preferred stock pays him 8% annual dividend and Buffett also has warrants of Occidental Petroleum. However, he had identified Occidental much before the oil spike even started. However, Buffett has admitted that his decisions had less to do with oil price outlook and more with valuations.

Is Buffett not worried about these electric vehicles (EVs) will disrupt the traditional hydrocarbons industry. To be fair, Buffett has been spreading his bets. He also made an investment in Chinese EV maker BYD in 2008. However, Buffett is one of the firm believers in the theory that, despite the hype and hoopla about EVs, fossil fuels will not be replaced in the near future. At a macro level, the sustained high rates of inflation in the US could be one factor that could explain Buffett’s torrid love affair with the oil stocks.