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Why did Warren Buffett sell Exxon?


Mephistopheles
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In a recent interview, Warren Buffett said that he sold Berkshire's stake in Exxon last year because he became "less enthusiastic about the price of crude oil" and that "the future wasn't going to be as good as people were saying it was going to be". This is interesting to me because everyone (including Warren) says that he doesn't spend even 10 minutes a year thinking of macro factors, but obviously in this case he did. I'm very curious to know how exactly he foresaw bad times ahead for oil. Anyone have any thoughts? Perhaps it can be a great learning example for all of us.

 

Another thing that's interesting is that within a quarter or two of the XOM sale, Todd/Ted were out of NOV, though by this time the oil collapse was well under way. I remember around that time Buffett said that XOM was sold because "they had better uses for the money" (as if they really were dependent on that $3.7 billion). I wonder if he gave a more diplomatic answer at that time because they were still in the process of unloading NOV.

 

http://www.bloomberg.com/news/articles/2015-09-08/buffett-says-he-sold-exxon-bought-refiner-phillips-on-oil-fears

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The price for a primary product halved.  Think if Coke or Burger Kind did that.  The business would be worth a lot less.  The price of the stock didn't move nearly as much as oil did last December, if I recall correctly.

I don't think there is much to read into this. I guess he sold because "there was better uses for the money". Only after oil collapsed did he say he was less enthusiastic about oil... a little bit of Captain Hindsight there.

 

That's true, but evidently he thought that the low price was here to stay, no? If it was simply because the stock didn't follow the price drop, then should he not be getting back into the sector big time now?

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I don't know, most traders/investors now weren't around in the 80s, but Buffet was. The price of XOM didn't follow the price of oil down, and at the time, a lot of people were saying that the price of oil would stabilize and/or go back up. That has't always happened in the past and Buffett has lost money on oil before, so I think he pulled the trigger b/c there was a good chance that he was going to lose money on the deal.

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The price for a primary product halved.  Think if Coke or Burger Kind did that.  The business would be worth a lot less.  The price of the stock didn't move nearly as much as oil did last December, if I recall correctly.

I don't think there is much to read into this. I guess he sold because "there was better uses for the money". Only after oil collapsed did he say he was less enthusiastic about oil... a little bit of Captain Hindsight there.

 

That's true, but evidently he thought that the low price was here to stay, no? If it was simply because the stock didn't follow the price drop, then should he not be getting back into the sector big time now?

 

I think he didn't really have to forsee a prolonged price decline. There was ample opportunity to get rid of XOM when the oil price had already gone down substantially. I think it's just the risk/reward picture that changed for him. At the time Buffett sold XOM it had already become a bet on a quickly reverting oil price. Not necessarily because people were purposefully speculating on that but because they bought it because of its dividend yield, implicitly placing a bet against falling oil prices. Buffett would never own a stock because of its dividend yield. He explained on more than one occasion why he thinks that focusing on dividends to value a business is a fools errand. He looks at cash flows and return on capital.

 

That said, I have never understood how his investing into commodity companies fits to the claim of complete macro ignorance.

 

I think sometimes he oversimplifies things to make a certain point for people who don't think about investing day and night. It's the same thing with his gold football field story while he has no problem owning silver, or holding cash for that matter. You could tell the same football field story with dollar bills and it would even be more dramatic. Of course, Buffett knows this. But you have to pay attention to whom he addresses certain stories and what he actually does. I think he's doing it right. People don't listen all that well, the media often only report the gist of what he's saying and therefore the story of gold not compounding is far more important to Joe Average than the currency aspect of it. And to Buffett it's more important that people get the aspect of investing into good businesses and not being distracted by all the macro prophecies.

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  • 2 months later...

 

My guess is that he saw that Shale oil had changed the game for a long time and XOM was overvalued with the new supply.

 

I've been wondering about that... and then he bought Phillips 66.

 

I'm wondering if he feels that the amount of oil available will be so high that the only bottleneck (and place to make money) will be in refining.

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Personally I think the comments from Warren Buffett about the prospects oil companies should not be understood as a short term consideration [the low oil price at the moment], but more in the light of the long term prospects of oil companies. Warren Buffett has approved investments of approx. USD 15 B in wind and solar in recent years in Berkshire Hathaway Energy, as an alternate energy investment.

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  • 1 month later...

is anyone else considering shorting XOM?

 

I don't really  have a thesis yet, but it just appears to be negatively convex at this price. It seems to have almost always traded 9-13X and in order to get back there, they really need oil to go up dramatically, or to issue shares in an accretive transaction (a very strong possibility in my view), but seems tough to argue that isn't already priced int.

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is anyone else considering shorting XOM?

 

I don't really  have a thesis yet, but it just appears to be negatively convex at this price. It seems to have almost always traded 9-13X and in order to get back there, they really need oil to go up dramatically, or to issue shares in an accretive transaction (a very strong possibility in my view), but seems tough to argue that isn't already priced int.

 

I've been thinking the same thing.  How does this trade back above $85?  Easy way to hedge and short out the energy markets.

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a pair that i'm considering is long the long duration low coupon bonds of the big independent acquisition targets (Apache, Anadarko, etc. and short XOM, CVX, etc.).

 

For example, if XOM took out APC, APC's 4 1/2% of 2044 would trade from $66 to $100 on the credit spread tightening. and I think shorting the big integrated protects you a little bit from the sustained lower for longer even the big IG issuers like anadarko default scenario.

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