by Tim Schfer, New York, for uro am Sonntag
WArren Buffett is highly respected on Wall Street for the sustained returns on his investments. But the US investor legend also has a pretty good reputation when it comes to the timing of investments. Buffett’s recent favorite: US oil company stocks. The financial genius massively increased its position in Chevron in the first quarter. In addition, Buffett recently bought more shares from Occidental Petroleum for $582 million. For months, the value investor has been collecting shares in the group obsessively. Holding Berkshire Hathaway’s stake has since risen to 17.4 percent. Analysts already suspect that a complete takeover could be pending.
Buffett’s greed for lacts has good reasons. Even after the most recent increase, the head of the International Energy Agency IEA, Fatih Birol, sees oil and gas prices remaining at a high level in the coming years. According to Birol, this is due to the complicated transition to clean energy sources. More is being invested in green technologies to combat climate change and reduce dependence on Russian oil and gas. But all this is not enough to replace fossil fuels.
The trend has long been observed in the broad US index S & P 500. The best performers of the past twelve months have almost exclusively been oil and natural gas companies. Devon Energy and Occidental Petroleum are at the top, both having doubled.
The plus of the US players
The advantage of the US companies: Not only do they have gigantic resources in the country, they also have access to the most modern search and production technologies – including fracking. In addition, the US federal tax of 21 percent is quite moderate in an international comparison. Even including state taxes, the average maximum tax rate is 25.8 percent.
In particular, the increase in fuel prices is bringing unexpected profits to oil and gas companies. US industry leader ExxonMobil has just forecast profits of up to 18 billion dollars for the second quarter instead of the previously expected 13 billion – it would be the highest profit for 25 years. Revenue for the entire sector is expected to reach $4 trillion in 2022, more than double the five-year average, Birol said. The IEA chief urged the big oil and gas producers to seize the “unique opportunity” to channel the massive profits into the clean energy transition.
US consumers, on the other hand, are suffering. The price of a gallon of gas is trending toward $6, up over 50 percent from January. The Democrats accuse the oil companies of greed for profit. In a letter to seven energy companies, President Joe Biden said excessive margins would “intensify the pain” for US consumers. He urged them to produce more fuel in the refineries.
In fact, the United States has lost 6 percent of its refining capacity since 2019. Many plants have been rebuilt to produce new products such as diesel from vegetable oil. Others closed permanently because they were in deficit and there was no way out. At the end of May, the White House released a record level of one million barrels per day for the next six months from the national strategic oil stockpile. In doing so, it wants to dampen rampant inflation, which was fueled further by the war in Ukraine. In addition, Biden is negotiating with other developing countries to at least strengthen the offer somewhat.
The high price of oil is also a belated consequence of the pandemic. The year 2020 in particular was bitter for the industry. Airplanes rested in the desert, ships were in port, cars were gathering dust in garages – correspondingly little fuel was used. The price for a barrel of oil of the US grade WTI even went negative for a short time because the warehouses were full and hardly anyone wanted the raw material in April 2020. Many corporations struggled to survive. Covid-19 halved the value of fracking companies. The heads of Exxon and Chevron were already confidentially discussing a merger. But both companies fell into a severe crisis, and the plan failed.
As a result, funding capacities were also greatly reduced. Since 2020, the number of drilling rigs in the USA has more than halved. But it was also a good time to buy ailing companies: US No. 2 Chevron made $5 billion for Noble Energy in July 2020. The smaller Devon Energy from Oklahoma City was also brave and bought the competitor WPX Energy in September 2020 for 2.6 billion dollars. The combined company committed to save $575 million annually. Thanks to the takeover, the company is now producing 575,000 barrels of oil a day, almost 70 percent of which comes from the Delaware Basin, which lies between west Texas and southern New Mexico.
At the same time, Devon boss Rick Muncrief reduced administrative costs by 13 percent and continues to reduce debt. The hard turnaround is paying off: The oil and gas producer earned $1.3 billion in free cash flow in the first quarter, a new company record. Quarterly earnings were just under $1 billion. And the stock market value doubled within a year to 40 billion dollars.
Fusion wave is rolling
More and more deals are being made. Texas-based Pioneer Natural Resources snapped up neighbor DoublePoint Energy in April 2021 for $6.2 billion. A few months earlier, Pioneer CEO Scott Sheffield bought Texas-based Parsley Energy, which his son Bryan had co-founded, for $4.5 billion. In November, Pioneer sold all of its Delaware Basin assets to also publicly traded Continental Resources for $3.25 billion in cash.
At the peak of the pandemic, the large US sponsor ConocoPhillips also took action. The Americans bought the shale oil company Concho Resources for $9.7 billion amid the oil price collapse. The two companies promised savings of half a billion dollars. In contrast to Exxon and Chevron, which cover the entire value chain and operate gas stations with shops themselves, ConocoPhillips is purely a seeker and promoter of black gold. Conoco is one of the world’s largest oil companies, although the board of directors divested itself of the refinery business ten years ago. The publicly listed Phillips 66 spin-off also includes Jet’s European service station network. ConocoPhillips stock is cheap despite a clear direction. This paper may also soon be one of Buffett’s favorites.
INVESTOR INFO
DevonEnergy
The group produces oil, natural gas and liquid gas, i.e. LNG. Boss Richard Muncrief buys, wants to further increase emissions. Money is plentiful thanks to the abundant bubbling cash flow, with $1.3 billion flowing in in the first quarter alone. The board of directors expanded the share buyback program by 25 percent to two billion dollars. The stock is only valued at seven times earnings. Most recently, the dividend was raised by almost a quarter, there could be special distributions.
Occidental Petroleum
Warren Buffett recently increased his stake. His stake is increasing, takeover rumors are making the rounds. In 2019, Buffett helped fund Occidental’s acquisition of Anadarko Petroleum. Since then, Buffett has received preferred stock, which pays particularly large dividends. He also received subscription rights. The management uses the high cash flows to pay off debts. cheap.
ConocoPhillips
The giant has one of the lowest production costs in the industry. Also in 2020, ConocoPhillips was one of the few sponsors to receive a positive free cash flow. The group does not hedge its oil and gas production, allowing it to take full advantage of rising energy prices this year. In the current year, the board of directors intends to return ten billion dollars to shareholders through dividends and share buybacks. Attractive.
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Image Sources: William Potter / Shutterstock.com
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