Warren Buffett is Spending Billions on Energy Stocks

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Despite economic growth falling in the United States and China, Europe in a recession and Japan moving well into the 21st year of "The Lost Decade," Warren Buffett has added greatly to the energy holdings of Berkshire Hathaway (NYSE: BRK-A).

Buffett recently opened a position in National Oilwell Varco (NYSE: NOV), with a 2.8 million share purchase of the oilfield equipment maker at the end of June.   The present holdings of Phillips 66 (NYSE: PSX), an oil refiner, were greatly increased so that it is now the 12th biggest for Berkshire Hathaway.  Phillips 66 is a spin-off from ConocoPhillips (NYSE: COP), a major oil company that is another high ranking stock in the portfolio of Berkshire Hathaway.

It is not just oil stocks that Buffett likes; he is bullish on the energy sector, in toto.  

This covers the entire range of operations, from searching for fossil fuels and other resources to delivering energy goods and services to end users.  ConocoPhillips explores and drills for oil and natural gas. National Oilwell Varco makes the oil equipment needed for those operations.  Phillips 66 refines the product for various end uses.  Lubrizoil, bought in September 2011, is the world's biggest maker of lubricants and additives for fuels for machinery.  Burlington Northern Santa Fe is a railroad that delivers a great deal of coal that was purchased by Berkshire Hathaway in 2009.  It is not just fossil fuels, either, that Buffett acquires: In 2011, the Topaz Solar Farm, a photovoltaic solar energy facility in mid-coast California, was purchased for $2 billion.

All of these have been very appealing buys.  For the most recent, National Oilwell, up 15.85% for 2012, now trades at discounts to both its trailing and forward earnings stream.  On a quarterly basis, both sales growth and earnings-per-share growth are increasing for National Oilwell Varco.  Phillips 66, the largest independent refiner by market cap, is also up 20.14% for the last month of market action.  Selling at a deep discount to its peers in the sector and the overall market, the price-to-sales ratio for Phillips 66 is just 0.15.  Buffett is picking up a dollar of sales at an 85% discount as reflected in the current share price of the stock

Interestingly enough, Buffett reduced the shares held by Berkshire Hathaway in consumer giants such as Kraft Foods (NASDAQ: KRFT), long a favorite.  The buying of energy stocks is certainly a manifestation of a bullish position on global growth.  The selling of Kraft Foods would seem to contravene the optimistic outlook of Buffett that has resulted in billions being expended on energy investments, obviously expecting a strong global demand.  However, that has been explained as resulting from the shift of consumer preference from name labels to generic brands.  That would certainly demonstrate clearly why Buffett bought Wal-Mart so heavily this year at the same time as Kraft Foods shares were being sold.

Energy stocks are noted for generating strong cash flow, allowing for healthy dividend yields.  This, too, is a Buffett favorite feature in a company.  As a dividend paying stock, National Oilwell Vacro has a 1.86% yield.  For Phillips 66, the dividend income paid to shareholders is registered at a 0.61% rate.  However, both of these energy sector entities have ample cash flow to allow for dividend growth and the initiation of stock repurchase programs in the future to reward shareholders.

Another Buffett signature move with the heavy investing in Phillips 66 and National Oilwell Varco is a willingness to buy at the top for a well-run company with a positive outlook.   Phillips 66 was close to its year high before the news of Buffett's buying took it to that level.  That same holds true for National Oilwell Varco.  Both now have relative strength index ratings that are indicative of an overbought stock.  But with Warren Buffett doing the buying, greater gains are likely ahead for Phillips 66 and National Oilwell Varco.


jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of National Oilwell Varco. Motley Fool newsletter services recommend National Oilwell Varco. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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