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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Should You Follow Buffett's Energy Strategy Into 2021?


For decades, Berkshire Hathaway (NYSE:BRK.B) chairman and CEO Warren Buffett maintained a pretty conservative approach to investing, only buying shares of businesses he was well acquainted with. As such, Buffett avoided tech and energy stocks before finally pulling the trigger on PetroChina Co. (NYSE:PTR) in 2002 and Apple Inc. (NASDAQ:AAPL) in 2011. The Oracle's foray into energy and tech initially paid off after he realized a tidy $3.5B profit on PetroChina while his $90 billion Apple stake now represents a ridiculous 20% of Berkshire Hathaway's market value.

Unfortunately, the same can hardly be said about Buffett's more recent energy picks.

Over the years, Berkshire Hathaway has lost several billions of dollars in its ConocoPhillips (NYSE:COP) stake as well as its Phillips 66 (NYSE:PSX) spinoff, eventually cutting ties with PSX at the depth of the oil price crash in May 2020.

Still, Berkshire Hathaway has maintained significant energy stakes that could pay off handsomely now that the oil and gas sector appears to be on a firm rebound.

Here are three energy stocks owned by Buffett that deserve your attention.

#1. Dominion Energy Berkshire Hathaway has always operated on Buffett's famous ethos of buying when the market is fearful and selling when it gets greedy. It, therefore, came as a huge surprise that the giant conglomerate remained muted when the market crashed in April despite sitting in a massive $137 billion cash hoard.

Buffett's rationale was simple: They had not done anything because they had not seen anything that attractive to do.

However, in July, Berkshire finally pulled the trigger and bought natural gas transmission and storage assets of Dominion Energy Inc. (NYSE:D), paying $4 billion in cash for the assets, and assuming $5.7 billion in debt.

Under the deal, Berkshire Hathaway Energy acquired 100% of Dominion Energy Transmission, Carolina Gas Transmission and Questar Pipeline as well as 50% of Iroquois Gas Transmission System. Berkshire also landed 25% of Cove Point LNG, one of just six export-import and storage facilities for liquefied natural gas in the U.S. Related: The World’s Most Controversial Pipeline Project Enters Its Final Phase

The purchase greatly increases Berkshire's footprint in the natural gas business, increasing its carrying market share to 18% of all interstate natural gas transmission in the United States up from 8% previously.

And that might turn out to be one of Buffett's better energy buys.

With bond yields stuck at historic lows, Barron's recently said that the best yield opportunities are clustered in the equity markets, ranking energy pipelines as the best income investment opportunity for 2021 ahead of dividend stocks, electric utilities, REITs, telecoms, convertibles, and junk bonds in that order.

Dominion Energy has been selling off after recently cutting its dividend, but thankfully, its peers Enterprise Products Partners (NYSE:EPD) and Salient Midstream & MLP (NYSE:SMM) are still decent picks.

#2. Suncor Energy According to Berkshire Hathaway's 13-F filings for Q2, the company bought around five million shares of Canadian oil kingpin Suncor Energy Inc. (TSX:SU) (NYSE:SU) during the second quarter. Berkshire now owns 19.2 million shares of Suncor worth ~US$217 million.

At first glance, Buffett's purchase of Suncor stock appears to have been driven by his long-term ethos to buy companies that are undervalued compared to their intrinsic values. After all, Suncor never truly recovered from the 2014 oil crisis and has been on a particularly sharp downtrend over the past two years. The Covid-19 pandemic and the oil price war only served to exacerbate the stock's unfortunate trend.

But there could be something deeper than that.

It appears Warren Buffett is a big fan of Suncor's assets, especially its long-lived oilfields with a lifespan of approximately 26 years. Suncor's dependable assets have helped the company generate stable cash flows and pay out consistently high dividends. Suncor had consistently increased dividends since it began distribution in 1992 till the 2008 financial crisis. The company, however, slashed the dividend by 55% in April due to the pandemic, but boasts a still respectable forward yield of 4.6%. Thankfully, the deep dividend cut really helped shore Suncor's balance sheet, which is now among the most resilient among its peers.

Related: Oil, Gas Rigs Increase For Seventh Straight Week

In fact, Suncor revealed that it requires WTI prices to be north of $35/barrel to meet capex and dividend payouts. With WTI prices now in the low 50s after several Covid-19 vaccines entered the fray, Suncor appears well placed to maintain that dividend and maybe even raise it in the not-so-distant future

Investors appear to love Suncor's new financial structure and have bid up the shares 44% over the past 90 days and 10% in the year-to-date.

#3. Phillips 66


Whereas Berkshire Hathaway's Suncor purchase can be viewed as a big endorsement of the battered energy sector, it would be disingenuous to ignore the company's bipolar moves on the sector. Notably, back in May, the giant investment company sold off its final stake in Phillips 66 (NYSE:PSX) despite repeatedly touting the company's management team as one of the best in the business, especially as far as capital management is concerned.

Buffett's love affair with Phillips 66 started well before the company became a stand-alone company. Back in 2008, Buffett purchased a stake in ConocoPhillips at a time when COP was an integrated oil and gas company, not the independent producer we know it as today well before the 2012 Phillips 66 spinoff. Berkshire sold off all of COP soon after the spinoff, but maintained most of the 27 million shares of Phillips 66 it got after the event. Buffett loved Phillips thanks to two major traits: Great dividends and share buybacks. Indeed, in 2016, Berkshire owned a 15% stake in Phillips 66.

However, since then, Berkshire has been a net seller of PSX, with the latest sale marking the final divestment. Berkshire sold 227,436 shares of PSX in March to bring its holding to zero compared to the more than 80 million Phillips 66 shares it owned just four years ago. Buffett is perhaps alarmed at how badly refiners like PSX have been doing since the pandemic.

However, the oil and gas rebound over the past two months has still helped PSX stock gain 35% over the past 90 days, even though oil demand remains well below pre-pandemic levels.

The moral of the story: Undervalued energy stocks might still be a profitable play, especially after the Covid-19 vaccines begin to enter mainstream distribution. In fact, Goldman Sachs rates both Suncor and Phillips 66 as companies with solid comeback prospects after the latest vaccine developments.

By Alex Kimani for Oilprice.com

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