Warren Buffett's Berkshire Hathaway Buys More Chevron Stock. Should You? | The Motley Fool (2024)

Last week, Berkshire Hathaway filed its 13F report for the end of 2023. Berkshire's 14.4% increase in its Chevron (CVX -0.39%) position was the standout move. With 126.09 million shares held, Berkshire has a Chevron stake worth over $19 billion -- its fifth-largest public equity holding.

Here's what you need to know about Berkshire's Chevron stake, how it relates to other moves, and whether the dividend stock is worth buying now.

A history of Berkshire's Chevron position

Even since Berkshire opened a stake in the fourth quarter of 2020, its Chevron position has arguably been its most active in terms of sizable buying and selling.

Data source: Berkshire Hathaway SEC Filings.

The real acceleration in buying occurred in the first quarter of 2022, undoubtedly in response to Russia's invasion of Ukraine and geopolitical tensions. But Berkshire cut its Chevron stake every quarter between the fourth quarter of 2022 and the third quarter of 2023. All told, the position was reduced by exactly one-third in that time period.

The 2023 fourth-quarter purchase of 15.85 million Chevron shares breaks the selling trend. When Berkshire first entered Chevron, it looked more like a value play. And when it loaded up on Chevron in 2022, it resembled more of a trade than a true long-term investment. I think Buffett and his team are trying to find a balance of what allocation makes sense for Chevron in the long term.

Industry consolidation

Berkshire's purchase in the 2023 fourth quarter is a stamp of approval on Chevron's $53 billion merger with Hess, which was announced on Oct. 23. This is a big vote of confidence for Chevron investors and oil and gas investors in general because it shows that the Oracle of Omaha likely supports the wave of consolidation that is sweeping the oil and gas industry.

This idea is further supported by Berkshire's Occidental Petroleum (OXY -0.43%) stock moves. Between Feb. 1 and Feb. 5, Berkshire bought 4.3 million shares of Occidental Petroleum, a 1.8% increase. Oxy is now Berkshire's sixth-largest public equity holding and is valued at $14.2 billion. But Berkshire owns 28.3% of Oxy and 6.8% of Chevron, since Oxy is a far smaller company.

Oxy also announced a sizable acquisition in the fourth quarter with intentions to buy Permian Basin producer CrownRock.

Berkshire has been buying Occidental Petroleum stock consistently for a while now. So that move alone wouldn't have necessarily verified that Berkshire approves of oil and gas mergers and acquisitions. However, the decision to reverse the selling trend with Chevron by making a sizable purchase paired with more Oxy stock purchases is a clearer sign that Berkshire views the energy sector as an excellent value play and supports consolidation.

Understanding Berkshire's moves

Outside of the usual repurchasing of Berkshire Hathaway stock, buying a boatload of Apple stock from 2016 and 2018 (and then selling some in 2020), and then the moves with Chevron and Occidental Petroleum, Berkshire has not made any other sizable changes to its public equity portfolio.

This tells me that Berkshire doesn't see better values out there than Apple -- which Buffett has praised as an elite business --and the energy sector, which remains a steep discount to the market. Oxy trades at a mere 12.5 price-to-earnings (P/E) ratio, while Chevron trades at a 13.3 P/E. Meanwhile, the S&P 500 P/E ratio is 27.1.

Dealing with P/E ratios for oil and gas stocks is a bit tricky. If oil and gas prices crash, then earnings will plummet or could even be negative, as we saw in 2020. A better question is whether the business can improve and do well even at lower oil prices.

Chevron's blowout 2023 earnings proved that the company can do extremely well when Brent crude is around $80 per barrel. The company was able to use operating cash flow for a sizable capital expenditure program and record buybacks and dividends, including boosting its dividend by 8%. So that's what investors can expect from Chevron at $80 Brent crude. The merger with Hess will boost cash flow even further.

On its fourth-quarter earnings call, Chevron said it can cover its capital expenditures and dividend with Brent crude in the low $50 range. It would probably eliminate buybacks in that environment. But still, Chevron could fund a massive dividend program and invest in its long-term growth even if oil prices fell significantly.

The company reduced its outstanding share count by nearly 5% last year. Given the size of the Hess merger, Chevron will likely pull back on stock repurchases in the short term. But overall, it is incredibly committed to buybacks, which Berkshire loves.

Chevron's ability to invest in its long-term growth, grow its dividend, and buy back a ton of stock when oil prices are around their current levels are key parts of the energy company's investment thesis and is likely a big reason why Berkshire likes the stock.

All systems go

Mirroring the trades of even the greatest investors isn't necessarily a good idea because their motives, position history, and structure are so different than an individual's. But tracking Berkshire Hathaway's moves could be useful to get a feel for Buffett and his team's opinions on the market.

The real insight won't come until May 4, when Berkshire holds its annual meeting. But for now, I think it gave investors a very clear sign that energy is the preferred sector for value, especially considering that the company trimmed its Apple position in the fourth quarter while adding to Chevron.

Barring a 30% or steeper decline in oil prices, Chevron will have a good year. If oil prices stay even remotely around where they are today, it will have an excellent year. If they rally, the company could have a near-record year.

Given its valuation, the risk/potential reward for Chevron stock makes a lot of sense right now. The 4.1% dividend yield is a sizable incentive to buy and hold these shares over time.