Investing legend Warren Buffett is fond of saying that his favorite holding period for a stock is “forever.” November 2013 brought the disclosure that Buffett had bought about 41 million shares of ExxonMobil (NYSE: XOM), the biggest oil and natural gas company in the world. Earlier this month, it was reported that Buffett had sold out of his position in ExxonMobil.
If anyone was looking for the definitive bearish indicator about the future direction for the price of oil and natural gas despite the recent rally, the mother ship has landed.
Buffett also dumped his entire position in ConocoPhillips (NYSE: COP), another major oil company. He did add 4 million additional shares of Suncor Energy (NYSE: SU), a Canadian energy company. But that is seen as more of a currency play due to Canadian assets trading at a discount.
After the moves, Buffett’s holdings in energy stocks stand at just 1.4%.
This is quite the reversal for The Oracle of Omaha. ExxonMobil was Buffett’s seventh-largest holding in the portfolio of Berkshire Hathaway (NYSE: BRK-A). Berkshire Hathaway’s largest acquisition ever, Burlington Northern Sante Fe Railroad, was a play on energy as much of the oil production from the Bakken Shale, and coal rides on its rails to market.
Just six months ago, a CNN story carried the headline, “Why Buffett is Betting on Energy Stocks Again.”
But now it appears as if energy securities are headed into a prolonged down cycle as Buffett bets against the sector. Ironically, the collapse started right about the time CNN reported on Buffett’s move into energy companies. United States Oil (NYSE: USO), a major exchange-traded fund for oil, was at its 52-week high of over $39 a share in July 2014. It is now around $18.50.
It is much the same story over the last six months with United States Natural Gas (NYSE: UNG), a major exchange-traded fund for natural gas, and Market Vectors Coal (NYSE: KOL), a major exchange-traded fund for coal, as shown by the chart below:
|Price||52-week High||6-Month Performance||Year-to-Date Performance|
|United States Oil||$18.65||$39.44||-46.50%||-8.40%|
|United States Natural Gas||$13.12||$27.89||-28.67%||1.87%|
|Market Vectors Coal||$13.45||$19.28||-25.03%||-2.18%|
As always, investors wonder: How to invest now?
For the long term, it is tough to deny the greatness of fully integrated Big Oil stocks such as ExxonMobil and Chevron (NYSE: CVX) that have operations in both upstream (exploration and production), and downstream (refining and marketing) activities. The lower prices of oil and natural gas will be good for the biggest economies in the world, which will increase demand in the future. From that, Big Oil stocks like Chevron and ExxonMobil will recover, and rise again. The chart below shows how much better these stocks have held up than those such as ConocoPhillips, which focuses on upstream activities:
|Price||52-week High||6-Month Performance||Year-to-Date Performance||Dividend Yield|
The share price for energy securities will probably continue to fall, though.
Buffett is obviously dumping energy shares. He didn’t build his $50 billion empire by being wrong in the stock market too many times. But he was wrong back in 2014 when he was loading up on energy stocks. That was obviously the time to sell out, not now after the huge drop in price.
However, a positive aspect of a falling share price is that the dividend yield increases in proportion to the decline. As detailed in another article, investors could set a target yield, say 4%, and then load up on shares of Chevron and ExxonMobil at that price for the long term as each has a history of dividend growth.
Jonathan Yates does not have a position in any of the stocks mentioned in this article.