Nobody’s stock picks are as anticipated or analyzed as Warren Buffett, whose Berkshire Hathaway is continually analyzed for portfolio changes as clarion signals as to what he’s is thinking at the moment.
Earlier this week, the tea leaves received another reshuffling with the announcement that Berkshire was spending nearly $1 billion to buy a division of Phillips 66, the refining chemicals and pipelines business spun off a year ago from ConocoPhillips.1
The division makes chemicals that improve the flow potential of pipelines carrying crude oil, refined products or wastewater.
This latest deal comes on the heels of Berkshire taking a $3.7 billion stake in oil producer ExxonMobil, which also happened to coincide with Buffett paring back his holdings in ConocoPhillips. In addition, he picked up a $500 million position in Canadian oil sands producer Suncor.
It appears evident that Buffett is betting on both the current boom in production of shale oil and gas, as well as on the longer-term rise in oil prices.
Earlier this summer, Berkshire Vice-Chairman Charlie Munger, who is known to be in a virtually continuous mind-meld with Hathaway essentially said as much: “Oil is absolutely certain to become incredibly short in supply and very high priced.”2
This idea also dovetails with a recent release by the International Energy Agency, which predicts that the US shale boom will peak in 2020 and that we’re in for a future of higher oil prices. According to the IEA, crude prices will advance to $128 a barrel, in 2012 terms, by 2035. (Oil is currently just below $100 a barrel).
Buffett also noted earlier this year that the oil and natural gas production surge in Montana, North Dakota and Canada will be a boost for his portfolio railroad company, Burlington Northern Santa Fe, which now carries about 25% of the oil from the Bakken fields.3
Buffett also has described how Burlington is exploring the conversion to natural gas engines, due to the huge gap in price between oil and a now bountiful supply of gas. As Buffett put it in March, “When you get natural gas at $3.50 and you look where oil is…you’ve got to look at any kind of an engine to natural gas.”
The Natural Gas Glut motif, a portfolio of stocks that could benefit from the future high supply of natural gas, has increased 6.2% during the past month; the S&P 500 has gained 2.3%.
In 2013, the motif was up 35.6%; the S&P 500 rose 29.1%.
1Stephen Foley, “Buffett in $1bn deal for oil flow business,” FT.com, Dec. 31, 2013.
2StreetAuthority, “Why Did Buffett Spend $3.4 Billion on Exxon? Here’s Your Answer,” Dec. 6, 2013, http://www.nasdaq.com/article/why-did-buffett-spend-34-billion-on-exxon-heres-your-answer-cm309663, (accessed Jan. 1, 2014).
3Jason Jenkins, “Warren Buffett and the US Oil and Natural Gas boom,” InvestmentU.com, March 20, 2013, http://www.investmentu.com/2013/March/warren-buffett-and-the-u.s.-oil-and-natural-gas-boom.html, (accessed Jan. 1, 2014).