On Warren Buffett and the Oil Sector

What are the Implications?

News hit in 2015 that Warren Buffett, through his Berkshire Hathaway investment vehicle, no longer owns Phillips 66 or National Oilwell Varco, as of his then most recent 13F filing with the SEC.

Phillips 66 was his largest overall sold position up through June 30 as per this analysis, for example. And this was reported further in the Wall Street Journal in mid-August here.

Turns out instead he was buying 10% of Phillips 66 but that he had received confidential treatment from the SEC for the buying period in question.

We have long been harsh critics of Warren Buffett's special 13F filing treatment status though you can see the argument that his investment strategy only succeeds when he can buy in secret - yet it also means he gets special treatment and there are implications here as well.

Some have loosely speculated why he might have done this now, but the fact remains that the business case for fossil fuel production in the US is under severe financial pressure.

Buffett himself spoke to the fact that his purchase of Phillips 66 was unique to the company and that the rest of the sector is not appealing.

And so perhaps this move is anticipating further consolidation in the public oil company sector at which point Buffett's move is all about timing and short term - very much not the long term buy and hold Sage from Omaha we know and love.

The argument is that given the economic slowdown in China, and more importantly the increase in supply from countries such as Saudi Arabia who feel geopolitically threatened in a time of increased global focus on climate change.

Saudi Arabia has the world's largest remaining reserves of fossil fuel, especially oil, and it is in their best interests to be the world's dominant supplier, which will require them to pump at higher levels and be seen as the low-cost producer (even if they too want prices to not bottom out as you might imagine).

This further puts pressure on Alberta in Canada where it is much more expensive (and arguably more environmentally invasive as well) to harvest the tar sands.  Projects that cost over $50 per barrel of oil to produce and higher are in a state of guaranteed economic loss if the price of oil remains near $40, and oil companies have had to increase borrowing to maintain their traditionally high level of dividend payments to shareholders.

All of this puts increased financial pressure on US companies involved in the sector, which is accelerating layoffs, reducing capital expenditure and switching to natural gas as has been the case with companies such as BP, ExxonMobil and Shell.

It is also important to note that Buffett and Berkshire Hathaway remain one of the largest owners of Suncor Energy so he has not completely sold out of the fossil fuel production sector.  

Some say he has been sending mixed messages on green energy. His large purchases of railroad companies have been criticized by some as being an indirect play on coal, through its transportation.

At the same time, he has committed $15 Billion to renewable energy investment.  He has also been a long-term investor in Chinese company BYD which is working on renewable energy storage and related battery technologies.

In this regard, Bill Gates, a close confidant of Buffett's has also accelerated his own investment in the R&D side of renewable energy, and so once again Gates and Buffett are aligned.

As the world's largest investors make moves to accelerate R&D and to install more renewable energy, this can only help accelerate the needed transition to a lower carbon economy. Pope Francis will address a joint session of Congress on this next month in Washington, DC. 

We have long written about our concerns about divestment as a strategy, however, we applaud the Gates and Buffett approach of accelerating investment in solutions.

In his mid-80s, Buffett may soon well transition out of the day to day decisions being made at Berkshire Hathaway, so whose call was this at Berkshire Hathaway is a key question - is the pressure on for  quick profit?

 A successor has apparently been previously chosen but not announced.  

No one will ever fully replace the Sage of Omaha, however , the likelihood is that long term value will continue to be found through careful research and long-term conviction, not short term gambles.  

With climate change effects expected to accelerate, what would you do if you were the Warren Buffett of tomorrow and what will his replacement do?