Warren Buffett's energy bet tops $40 billion, a record for Berkshire Hathaway

Published Mon, May 2 20223:39 PM EDTUpdated Mon, May 2 20224:23 PM EDT

Warren Buffett piled into the winning energy sector like never before in the first quarter as the longtime value investor took advantage of "gambling in the market" to pick up established oil and gas players at attractive prices. Berkshire Hathaway increased its Chevron bet by fivefold to $25.9 billion at the end of March, making the energy stock among the conglomerate's four biggest equity holdings. Meanwhile, the "Oracle of Omaha" bought $7 billion worth of Occidental Petroleum 's common shares in additional investments last month. "Him and Charlie think it's the most attractive sector in the world, just as it was in the 1970s," said Cole Smead, president and a portfolio manager at Smead Capital Management. Energy has been the cream of the crop this year on the back of surging oil prices. The S & P 500 energy sector is the only grouping in the green for the year, and it's up a whopping 34% compared to the broader benchmark's 14% loss. Occidental shares have doubled in value this year, becoming the best performer in the S & P 500. Chevron is up 35% in 2022. Never been higher In absolute dollar terms, Berkshire's investment in energy stocks has never been higher, according to James Shanahan, a Berkshire analyst at Edward Jones. He estimated the current exposure to Chevron and Occidental's preferred and common stocks stands at approximately $43.5 billion, about 12.5% of the portfolio. The last time that an energy stock was among Berkshire's largest holdings was when the conglomerate owned Philipps 66 in 2015, and that was about a 4% position, according to Shanahan. On the stage at Berkshire's annual shareholder meeting over the weekend, Buffett provided little insight on his big Chevron investment. However, he did reference the jaw-dropping slide in oil prices during the early days of the pandemic and indicate his confidence in America's oil production in the future. "The world changed. Oil sold for negative $37 a barrel one day," Buffett said on Saturday. "Now it's quite apparent I think that we're very happy, we should be very happy, that we can produce 11 million barrels a day, or something of the sort in the United States, rather than being able to produce none and having to find 11 million barrels a day somewhere else in the world to take care of keeping the American industrial machine working." In April of 2020, an oversupply of oil led to an unprecedented collapse in oil prices, forcing the contract futures price for West Texas Intermediate to plunge to around -$37 a barrel. Prices have since surged with the contract topping $100 per barrel amid economic reopening and heightened geopolitical tensions. 'Gambling parlor' To tens of thousands of shareholders who flocked to Omaha for the first time in three years, Buffett broke down how he was able to scoop up 14% of oil giant Occidental Petroleum , worth more than $7 billion, in just two weeks during March. The investing legend pointed out that the stake was even larger when accounting for the index fund providers who own a huge chunk of the company (about 40%) and don't sell their stock. "With 60% of the stock outstanding, I go in and tell Mark Millard (Berkshire's director of financial assets), this fellow that is 30 feet away from me or so, and I say in the morning to him, you know, 'Buy 20% and take blocks, or whatever it may be,'" Buffett said. Buffett said the short-term volatility earlier this year fueled by "gambling mentality" allowed him to find good long-term opportunities. "Overwhelmingly, large companies in America, they became poker chips," Buffett added. "That enabled us, in a two-week period, to buy 14% of a business that's been around for decades ... Essentially, this is a gambling parlor." "I find it just incredible. You wouldn't be able to do that with Berkshire. I mean, you can't literally. You can say you want to buy 14% of the company. It's going to take you a long, long time," Buffett added. Berkshire's stock is one of the least traded securities in the market. It has one of the highest price tags — just below $500,000 a pop for class A. Meanwhile, its investors are long-term holders just like Buffett, and they rarely sell. 'We're sane' Following a long stock-selling streak, Berkshire finally used its war chest of cash to purchase $51 billion of stocks in the first quarter. The buying spree followed Buffett saying as recently as February in his annual shareholder letter that there was an absence of investment opportunities that "meet criteria for long-term holding." The market pullback and surge in energy prices apparently caused him to change his view. Buffett sounded more optimistic about capital deployment opportunities this time, and his trick is simple: staying sane in a market that looks more and more like a casino. "Markets do crazy things, and occasionally Berkshire gets a chance to do something," Buffett said. "It's not because we're smart. It's because the only thing I say we're qualified on is that I think we're sane. And that's the main requirement in this business." Correction: An earlier version misstated the date that an oversupply of oil led to an unprecedented collapse in oil prices, forcing the contract futures price for West Texas Intermediate to plunge to around -$37 a barrel.