Warren Buffett's company, Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B), recently revealed its latest stock transactions. One of its more notable purchases was shares of oil giant Chevron(NYSE: CVX). The move saw Buffett's company add to one of its biggest positions.
Here's a look at what likely drove Berkshire Hathaway's latest oil stock buy and whether other investors might want to buy shares, too.
Buying back following a little trim
Berkshire Hathaway bought 16 million shares of Chevron during the fourth quarter. That brought its total to 126 million shares worth over $19 billion. It makes Chevron its fifth-largest holding at 5.3% of its investment portfolio. That's a bigger position than fellow oil producer Occidental Petroleum, which currently clocks in at number six. While Berkshire owns 28.3% of Occidental's outstanding shares (compared to 6.8% of Chevron's), they're worth less than $15 billion, putting the oil company at 4% of its portfolio.
Berkshire's fourth-quarter purchase of Chevron is a very interesting development. Buffett's company had started trimming its investment in the oil producer, selling 13 million shares in the third quarter. The likely driver of the switch from selling to buying was Chevron's sell-off during the quarter:
Shares of Chevron declined by double-digits during the quarter, weighed down by its decision to acquire fellow oil producer Hess(NYSE: HES) in late October. The market wasn't entirely thrilled with that move, which will add Guyana to Chevron's portfolio. It adds a layer of geopolitical risk following news that the country's neighbor, Venezuela, threatened to annex part of its territory. That could give it control of the offshore oil resources.
The bull case for Chevron
While acquiring Hess adds risk, Chevron has a long history of navigating geopolitical issues (and integrating large acquisitions). It believes its Hess deal will create value for investors over the long term by enhancing its free cash flow and extending its growth profile into the 2030s. The acquisition would help Chevron more than double its free cash flow by 2027 (assuming $70 oil). That would give it more cash to return to shareholders.
However, even without Hess, Chevron is on a strong growth trajectory. The company estimates it will grow its free cash flow by more than 10% annually through 2027, assuming $60 oil. That would enable the company to continue increasing its dividend (it gave investors an 8% raise this year) while buying back shares at the low end of its $10 billion-$20 billion target range. At that rate, it could retire about 3% of its outstanding shares each year at the current price. Meanwhile, higher oil prices and the Hess deal would enable Chevron to produce even more cash that it can return to shareholders.
The company is coming off a record year of cash returns. Last year, it sent investors over $26 billion (18% more than in 2022). It paid $11.3 billion in dividends (3% higher on an absolute basis and up 6% per share) while repurchasing $14.9 billion in shares (up 32% from 2022).
Chevron also continued investing to grow its traditional and lower-carbon businesses. Its worldwide production was up 4% last year, fueled by its acquisition of PDC Energy and growth in the Permian Basin, where its output surged 10%. Chevron also acquired a majority stake in ACES Delta, which is developing a leading green hydrogen production and storage hub. In addition, it's investing to grow its renewable fuels production and carbon capture and storage capabilities. These investments position Chevron to meet today's energy needs and support a lower carbon future.
Buying the dip is a smart idea
Warren Buffett's company capitalized on the sell-off in Chevron to buy more shares of the oil giant. That could turn out to be a wise investment. While its acquisition of Hess adds risk, it will also significantly enhance its growth profile. Meanwhile, the company's investment strategy continues to pay dividends by growing its traditional and lower carbon businesses, cash flow, and cash returns. With lots more growth ahead, Chevron could prove to be a very enriching long-term investment. Following Buffett's company's decision to buy the dip in Chevron could be a smart decision.
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Matt DiLallo has positions in Berkshire Hathaway and Chevron. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
