Warren Buffett's Berkshire Hathaway has scored about a $13 billion gain on Chevron and Occidental – and now the 2 energy stocks rank among its biggest bets
The famed investor’s conglomerate has piled roughly $20 billion into Chevron and around $10 billion into Occidental, a Markets Insider analysis of Securities and Exchange Commission filings shows. Those positions are now worth $29 billion and $14 billion respectively, or $43 billion together, as of Monday’s close.
Berkshire established a stake in Chevron in the second half of 2020. It more than quadrupled its position in the first quarter of this year, and topped it up to 161 million shares, or 8.2% of the company, in the second quarter. The wager has paid off so far, as Chevron’s stock price has surged 52% to an all-time high this year.
Warren Buffett’s Berkshire Hathaway reveals how inflation, worker shortages, supply constraints, and flagging consumer demand are hitting American companies
Berkshire Hathaway’s Q2 earnings provide valuable insights into the health of the US economy.
Warren Buffett’s company faced inflation, worker shortages, supply woes, and patches of weak demand.
Geico faced higher prices for used cars and auto parts, while McLane battled to find truck drivers.
American companies are battling numerous headwinds, such as inflation, shortages, supply-chain disruptions, and concerns about consumer spending.
Warren Buffett’s Berkshire Hathaway owns scores of businesses, including insurers, railroads, utilities, manufacturers, distributors, retailers, and service providers. That makes the company a microcosm of the wider US economy.
Buffett’s conglomerate recently published its second-quarter earnings, which offered a fresh look at how everything from higher fuel prices to wage inflation and worker shortages to interest rates are affecting American businesses.
Here are nine Berkshire divisions dealing with major headaches:
Insurance
Geico recorded a pretax underwriting loss of nearly $500 million in the second quarter, compared with a gain of $626 million in the same period last year.
The auto insurer, known for its gecko mascot, blamed higher used-car prices and shortages of auto parts, which made paying out insurance claims more expensive.
Railroads
The BNSF Railway reported a 70% rise in its first-half fuel expenses as a result of higher energy prices. However, it passed the increase on to customers via greater fuel surcharges, which drove a double-digit increase in its average revenue per railcar.
Notably, the freight-railroad network carried lower quantities of consumer, industrial, and agricultural products in the quarter. It blamed those declines respectively on international supply-chain disruptions, fewer petroleum shipments due to less demand for crude by rail, and reduced grain exports.
On the other hand, BNSF’s coal revenues jumped 30% in the first six months of this year, reflecting more electricity generation, higher natural-gas prices spurring customers to switch fuels, and greater export demand.
Utilities and real estate
Several of Berkshire’s utilities benefited from higher retail and wholesale energy prices in the quarter. However, MidAmerican Energy’s profits were tempered by higher costs for the power it purchased.
Berkshire’s real-estate brokerage saw its profits decline in the period, as rising interest rates tempered demand for its mortgage, brokerage, and settlement services.
Industrial products
Berkshire’s industrial-products division was hit by higher costs, supply-chain disruptions, and labor shortages in the quarter. Those headwinds largely offset higher average selling prices and greater demand for certain products.
Precision Castparts — a manufacturer of aerospace parts — noted that both materials and utilities rose in price last quarter, and that worker shortages led to manufacturing inefficiencies.
Lubrizol, a chemicals specialist, said shortages of raw materials weighed on its first-half sales volumes. It also hiked prices to offset rising costs of raw materials such as oil feedstocks, as well as of utilities, packaging, and shipping.
Marmon, an industrial conglomerate, benefited from higher average prices for metals, but took a $90 million blow from the shutdown of its rail-and-leasing business in Russia.
Building products
Berkshire’s building-products division — home to brands such as Clayton Homes and Benjamin Moore — gained from robust demand for residential construction in the first half of 2022.
However, it expects higher home-mortgage rates to weaken demand for homebuilding, which should weigh on its performance over the coming months.
The segment continues to suffer from supply-chain disruptions and sharp cost increases for many raw materials as well as energy, freight, and labor. However, it benefited from higher average selling prices last quarter, as it passed on its increased input and transportation costs.
Consumer products
Berkshire’s consumer-products segment — which houses brands such as Brooks and Fruit of the Loom — suffered a 16% drop in apparel sales last quarter, as retailers’ ballooning inventories resulted in their ordering less stock.
Moreover, apparel-and-footwear earnings roughly halved due to lower sales volumes, manufacturing inefficiencies, and higher costs for raw materials, freight, labor, and other inputs. Berkshire warned the trend was likely to continue for the rest of this year.
Forest River, a maker of RVs and pontoon boats, reported higher costs of materials, and signs of slowing demand after several years of exceptional growth.
Services
TTI, an electronics distributor that cashed in on the microchip shortage during the pandemic, is starting to see demand slow due to higher inventory levels across the industry’s supply chain.
NetJets and FlightSafety passed on higher fuel prices to customers in the form of surcharges. However, they reported lower earnings, as they had to use subcontracted aircraft to meet an exceptional increase in customer flight hours.
Retailing
Berkshire Hathaway Automotive saw more valuable transactions on average, but sold fewer vehicles in the quarter. The car-dealer network blamed limited production of new vehicles by automakers, which reflected microchip shortages and other supply-chain disruptions.
Berkshire’s home-furnishings businesses reported higher average selling prices but lower transaction volumes, leaving their revenues virtually flat.
The rest of Berkshire’s retailers suffered a 21% slump in earnings, largely due to a poor performance by its furniture sellers and Pampered Chef.
10/10 SLIDES
In addition, Buffett and his team built a nearly 21% stake in Occidental from scratch this year, primarily in early March. They have scooped up 194 million shares to date, and Occidental stock has jumped 134% this year.
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At the same time, Berkshire owns $10 billion of preferred stock in Occidental, as well as warrants entitling it to buy another 83.9 million common shares at a fixed cost of $5 billion. Those shares would be worth $6.1 billion at the current stock price.
Even excluding the preferred stock and warrants, Chevron and Occidental now rank among the most valuable positions in Berkshire’s portfolio. Only five of the conglomerate’s top 15 holdings were valued at north of $10 billion at the end of December, and only two above $25 billion.
The fossil-fuel wagers stand out from Berkshire’s biggest holdings, many of which are longtime Buffett favorites in the consumer-products and financial-services sectors. Those include Apple, Bank of America, Coca-Cola, Kraft Heinz, and American Express.
Buffett and his team bought the lion’s share of their Chevron and Occidental shares in late February and early March, suggesting they saw a chance to capitalize on the surge in energy prices sparked by Russia’s invasion of Ukraine on February 24. Or they may have simply determined the two companies were undervalued, well-managed, and good sources of income.
It’s worth noting the Biden administration has accused major oil companies of “war profiteering,” and threatened them with a windfall tax if they don’t use some of their outsized profits this year to invest in domestic production. That headwind could weigh on Chevron and Occidental shares going forward.
For now, the two wagers are helping Berkshire to weather a tough market backdrop. While fears of inflation, recession, and further interest-rate hikes have pulled the S&P 500 down 19% this year, Berkshire shares are only down 2%.
Buffett might also see the pair of energy bets as a portfolio hedge against a broader market decline, and a way to offset the painful impact of higher fuel costs on several of Berkshire’s businesses.
“He wants that exposure to potential higher inflation, higher oil prices,” Josh Young, a fund manager and specialist in energy stocks, said about Buffett’s Occidental bet in August.
Berkshire will reveal how much it spent on stocks last quarter, and which names it bought and sold, when it publishes its third-quarter earnings and portfolio update later this month.
