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Warren Buffett-Led Berkshire Hathaway Keeps Selling Chevron Stock. Should You?

Motley Fool - Sun Nov 26, 2023

Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) filed its third-quarter 2023 13F on Nov. 16, 2023.

The report showed that Berkshire held 110.25 million Chevron(NYSE: CVX) shares as of Sept. 30, 2023, good for 5.9% of its public equity portfolio and making it the fifth largest position behind Apple, Bank of America, American Express, and Coca-Cola.

Chevron remains a core holding. But Q3 marked the fourth consecutive quarter that Berkshire has sold Chevron stock. Let's dive into Berkshire's history with Chevron and see whether you should follow its lead and also sell this dividend stock.

Workers on an oil drilling rig.

Image source: Getty Images.

Berkshire's evolving Chevron position

Chevron is a relatively recent investment for Berkshire. The company first bought shares in Q3 2020, cut the position in 2021, then began building it up again in Q3 2021. Between Q3 2021 and Q3 2022, Berkshire's Chevron position surged 576%.

Berkshire Hathaway Chevron Shares

File Date

Holdings As Of Date

110.25 million

11/16/2023

9/30/2023

123.12 million

8/14/2023

6/30/2023

132.41 million

5/15/2023

3/31/2023

162.98 million

2/14/2023

12/31/2022

165.36 million

11/14/2022

9/30/2022

161.44 million

8/15/2022

6/30/2022

159.18 million

5/16/2022

3/31/2022

38.25 million

2/14/2022

12/31/2021

28.70 million

11/15/2021

9/30/2021

23.12 million

8/16/2021

6/30/2021

23.67 million

5/17/2021

3/31/2021

48.5 million

2/16/2021

12/31/2020

0

11/16/2020

9/30/2020

Data source: Berkshire Hathaway SEC Filings.

Since Q3 2022, Berkshire has gradually reduced its stake. It holds exactly one-third fewer shares from its peak. Investors are probably asking why Berkshire is selling Chevron, if it is selling other stocks too, and when it will stop selling Chevron.

Berkshire is betting big on energy

Chevron isn't the only stock Berkshire is selling. It sold $7 billion in equities in Q3 compared to buying just $1.7 billion.

Berkshire has a great deal of exposure to oil and gas outside of Chevron. Occidental Petroleum(NYSE: OXY), also a relatively new holding, is Berkshire's sixth largest holding right behind Chevron. Together, they make up 10.5% of its public equity holdings, which would be the second largest position behind Apple and ahead of Bank of America if it were the same company.

Perhaps even more importantly, Berkshire Hathaway owns a lot of oil and gas-related companies, including utility assets through Berkshire Hathaway Energy (BHE). Estimates vary, but BHE could be worth around $90 billion. Berkshire's 92% ownership of BHE earned it $4.3 billion in 2022 profits, so putting a 20 or so multiple on the business makes the $90 billion valuation look reasonable and illustrates the scale of Berkshire's exposure to the energy sector.

There's also a good chance that Berkshire never meant for its Chevron position to remain large over the long term. The initial purchase came during the worst of the COVID-19 pandemic when oil and gas stocks saw multiyear-low valuations. But the real surge came after Russia invaded Ukraine, which disrupted the energy market and put a premium on energy security and reliability.

There's also the inflation component to the story. Oil and gas have been a cause of inflation, not a victim. And oil and gas companies, with their immense cash-flow generation, have been relatively impervious to inflation compared to interest rate-sensitive growth areas like renewable energy. Chevron's strong cash flow and balance sheet mean it isn't reliant on debt financing, so it isn't as affected by high-interest rates. It's reasonable to assume that at least some of the Chevron stake was a short-term play. But there's also a long-term component since Berkshire has been trimming its position, not fire-selling it.

A simple way to invest in oil and gas

Chevron has sent a clear message to the market that it believes its best use of capital is within the oil and gas industry. In late October, Chevron announced the $53 million all-stock merger with exploration and production company, Hess. The deal will boost Chevron's free cash flow and give it exposure to assets offshore Guyana, among other plays. It marks Chevron's largest deal in over 20 years.

Chevron can afford the deal without overly leveraging itself. Chevron has spent years paying down debt and compressing its leverage ratios. It got to a point where Chevron's balance sheet was in almost too good of shape. For example, it finished 2022 with just $5 billion in net-total long-term debt, which is a very small number for a company the size of Chevron. So it diverted excess cash flows to raising the dividend and buying back stock -- and now a massive acquisition.

Chevron's management team, led by its CEO, Mike Wirth, has a track record of making excellent decisions by walking away from opportunities when they are too expensive, keeping capital spending low when it makes sense to, and then ramping up investment at the right time. The fundamentals point toward now being a good time for Chevron to go on the offensive.

Time to buy the dip on Chevron stock

Chevron's acquisition of Hess will make it more exposed to the price of oil. So it isn't too surprising that Chevron stock has sold off lately since West Texas Intermediate oil prices have fallen from prices over $90 per barrel in late September to the mid-to-high $70 per barrel range.

Given Berkshire's history with Chevron, its other public equity holdings, and its exposure through BHE, it seems reasonable to see the Chevron stock sale. But individual investors are in a different position.

Chevron's history of dividend raises, low production costs, and diversification, both geographically and throughout the integrated oil and gas value chain, make it a foundational oil and gas stock worth owning for the long term.

With a 4.2% dividend yield, Chevron is an excellent way to invest in oil and gas while also collecting passive income.

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American Express is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Bank of America, and Berkshire Hathaway. The Motley Fool recommends Chevron and Occidental Petroleum and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.

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