2 Investing Lessons From Warren Buffett’s Massive Energy Bet | Smart Switch: Personal Finance

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When Warren Buffett bets big on something, the financial industry takes notice. To be honest, if Buffett does anything, the investment community is watching closely.

And for good reason. holding him, Berkshire Hathawayhas delivered an annual rate of return of about 20% since 1965, which is twice the rate of return of the S&P 500 during the same period.

This year, Buffett has bet heavily on energy, specifically oil companies. According to Berkshire Hathaway’s most recent 13F (an SEC-mandated form that institutional investment managers file quarterly), Buffett has invested more than $25 billion in oil companies in the first quarter of 2022.

Here are two valuable investment lessons we can draw from this massive bet on the fossil fuel industry.

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Invest in stocks with secular tailwinds

The oil and gas industry has done exceptionally well in 2022, in a year in which the the general market is down great. The reasons are quite obvious. When lockdowns went into effect in 2020, people stopped driving and demand for gasoline collapsed almost overnight. This resulted in a significant reduction in drilling by oil companies. But more recently, as people began to return to work and leave their homes after the shutdowns, demand for gasoline has skyrocketed.

Russia then invaded Ukraine, further reducing the supply of oil. In other words, the demand has increased and the supply has decreased. You don’t need a doctorate in economics to understand why oil prices have skyrocketed this year.

So it makes a lot of sense that Warren Buffett recently invested in oil companies, but is this really a “secular tailwind”?

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According to forecasts from the US Energy Information Administration, US crude oil production will likely average 11.9 million barrels per day (B/D) in 2022 and 12.8 million B /D in 2023, which would set a record for the largest US crude oil production in a single year

While it may seem like we’re about to break away from our dependence on fossil fuels, we’re actually setting new records for oil production. If these forecasts are accurate, it is clear that our society is not moving towards renewables as our primary energy source any time soon.

This is what Buffett is betting on, and so far, it has paid off.

Invest in what you know

Buffett and Berkshire Hathaway have been investing in energy companies for many years, so it is safe to say that this is an industry that they understand well. While the rest of the world seems to have dismissed the fossil fuel industry as an aging dinosaur, Buffett used his deep understanding of the oil production process to his advantage.

In the first quarter of 2022, Buffett bought $7 billion worth of stock from Western Petroleum (New York Stock Exchange: OXY) and increased its participation in Chevron (New York Stock Exchange: CVX) for more than $20 billion.

So far, those bets have paid off enormously:

Total CLC Performance Level data by YGraphics

At first glance, you might think that this investment is just a lucky short-term speculation on the price of oil. But if you dig into the intricacies of the industry, you begin to see why Buffett has made such a big bet on these two companies.

Two tables to understand the oil and gas industry

The fossil fuel industry is complex, but the two tables below could shed some light on Buffett’s strategy for investing heavily in this sector.

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First, the oil and natural gas industry is divided into three streams: upstream, midstream, and downstream. Here is a breakdown of the role of each in the overall production process:



Down river

Location of new oil fields.

Oil and gas storage.

Refining of crude oil and natural gas into the finished product

Offshore drilling of wells/platforms

Oil and gas transportation

Sale to distributors (gas stations, home gas providers, fertilizer producers, etc.)

Pumping crude oil out of the ground

Operating pipelines

Sometimes sell the finished product directly to the consumer

Some companies operate in a single stream, while others participate across the spectrum. These are known as “integrated“Oil and gas companies.

While it is understandable to think that any company operating in this industry would be greatly affected by the rise or fall in the price of oil, this is not necessarily the case, and Buffett understands this.

The table below shows how each stream is affected by oil prices.

How different energy flows are affected by oil prices



Down river

most impacted

less shocked

less shocked

This is because…

The cost of extracting the crude product is extremely high and largely fixed, while the price at which they can sell it fluctuates. If the price of oil falls, so do profit margins.

This is because…

These companies charge a fee to transport the crude, they do not sell it. This means that they are more insulated from price fluctuations; however, they are not immune. As prices fall, less oil is extracted and less needs to be transported.

This is because…

Since these companies refine crude oil into usable products, they charge a premium, which gives them pricing power.

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Both Chevron and Occidental Petroleum are integrated oil companieswhich means that they own and operate assets in all three streams of the production and refining process.

Therefore, although these companies have benefited greatly from the increase in oil pricesthey are also protected from future price drops.

Play to your strengths

The main takeaway from Buffett’s energy bet is to look for sectors and industries within your area of ​​expertise because you will recognize unique opportunities. And when those sectors benefit from macroeconomic tailwinds, he could be looking at a once-in-a-decade buy scenario.

As a long-term investor in the oil and gas industry, Buffett was able to see the writing on the wall and understand that this is probably not a short-term boom for integrated oil companies like Chevron and Occidental Petroleum.

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mark blank has no position in any of the mentioned stocks. The Motley Fool holds positions and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: Long $200 January 2023 Call Options on Berkshire Hathaway (B Stock), Short January 2023 $200 Put Options on Berkshire Hathaway (B Stock), and Short $265 Call Options on Berkshire Hathaway (B Stock). January 2023 in Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.