Berkshire Hathaway (BRK.A) has been investing heavily in oil and gas this year — Chevron (CVX) now ranks among Berkshire’s top four holdings. Buffett’s holding company owns approximately $26 billion worth of its stock.
Chevron is up an astonishing 34% year-to-date versus the S&P 500 which, at the time of research, was still down double digits in percentage terms, so is it too late to buy Chevron?
Chevron Upstream Earnings Skyrocket
Chevron is an energy giant involved in every aspect of this industry, ranging from production to refinement, and from transportation to power generation. Its position in the oil and gas industry makes it one of the largest global companies.
Chevron is an integrated oil company, meaning it operates upstream oil and gas production and downstream refining and chemical operations. Both segments benefited from strong market conditions this past quarter.
Upstream earnings jumped by 170%, and downstream earnings soared over 300%. Chevron blew past analysts’ estimates even after experiencing downtime for maintenance breaks.
Buffett’s Goes All In On Energy
Buffett has been aggressively buying up shares of energy-related stocks this year. For example, since reinvesting in Occidental Petroleum, Buffett’s ownership stake has reached almost 20%.
He, along with other well-respected investors, believes the energy sector could yield significant returns as macroeconomic conditions deteriorate (inflation soaring), global politics takes center stage (Russia-Ukraine) and demand remains high.
While his investment in Chevron may seem like a recent play, the Oracle of Omaha made his big move back in Q3 2021. He increased his holdings by nearly 25% during this period, acquiring 5.6 million shares.
In the next quarter, he bought roughly 9.4 million more shares — and in Q1 2022, he more than 5x’ed his holdings. As of this writing, Berkshire holds 159.61 million shares of Chevron.
Chevron Ticks Another Two Major Boxes
Buffett tends to seek out wide-moat, long-term investments. Although he is confident in the energy sector, there’s another reason why shares of Chevron are attractive to him and other long-term investors — the company’s healthy dividend of 3.6%.
This return is well above the S&P 500’s average dividend yield of 1.5%. Chevron’s dividend dates back to 1990 and has been sustained through other challenging economic cycles so investors can sleep easy knowing its well protected.
Another appealing factor is Chevron’s financials.
The oil and gas giant has solid sales and operating margins. In the Q1 2022 report, sales and other operating revenues hit $52 billion, compared to $31 billion in the year-ago period. Earnings were $6.3 billion for the first quarter, compared to $1.4 billion in the first quarter of 2021.
The company’s Q2 report was even more impressive, with earnings of $11.6 billion (compared to $3.1 billion in Q2 2021) and a free cash flow of $10.6 billion.
Chevron’s most recent profits set a new quarterly record, though they could have been higher if not for the company’s recent refinery output issues. However, this is a temporary headwind.
Moving forward, Chevron should be able to capitalize on the red hot refining market. Shareholders can feel confident in Chevron’s integrated business model that allows it to capture value throughout the supply chain.
Is Now the Time to Buy?
When Buffett takes an interest in a company like he has Chevron, it’s typically a good indication that the stock has the potential to outperform over the coming years. As his position in Chevron and the energy sector grows, it’s reasonable to think the stock may be primed for a significant upside.
While Buffett has certainly had mis-steps with technology investments, such as with IBM, the energy sector is well within his wheelhouse. Generally, when Buffett bets big, as he has done with Apple and Bank of America, he wins big too. Chevron is now in his top 4 holdings, and it will be surprising if it doesn’t reap large rewards for him and those who follow his lead.