Warren Buffett and other billionaires are buying blue-chip energy stocks. Here's why.

By Michael Brush

Energy sector is keeping the lights on for investors

Billionaires like Warren Buffett have been plowing huge sums into energy stocks. For example, this month through June 17, Buffett's Berkshire Hathaway (BRK.A) (BRK.B) deployed $434.8 million into Occidental Petroleum (OXY) at prices up to $60.43 per share, adding to the company's already huge position.

Also this month, the Mexico-based investment company Control Empresarial de Capitales, controlled by billionaire Carlos Slim, has invested $75.5 million into PBF Energy (PBF) at prices up to $45.40 per share. Slim's investment company has put $150 million into the stock since January.

To understand why energy stocks are attracting these savvy investors at this time, I turned to energy analyst Ben Cook, who manages Hennessy Energy Transition Fund HNRGX and Hennessy Midstream Investor HMSFX. He offered some perspectives on energy's appeal, in particular for the two stocks on Buffett's and Slim's buy list:

Occidental Petroleum

Occidental is one of the largest oil and gas producers in the world, with operations in the Middle East, North Africa and the U.S., where it has a big position in the Permian Basin. It is in midstream transport and chemical production. It has a carbon capture business called Oxy Low Carbon Ventures.

Occidental has paid down a huge debt for buying Anadarko in 2019. It now has a reasonable leverage ratio of 2.1 times debt to Ebitda. Occidental produced an operating cash flow of $2 billion and it pays a dividend yield of 1.4%.

Why is Berkshire Hathaway buying? "Occidental is a big, liquid name and an easy way to play oil in the U.S.," Cook says. Here's another reason. "There is a deleveraging effect due to higher oil prices," says Cook. "Most of the large-cap energy companies have capital allocation priorities that benefit the equity holder." Companies are reducing debt, buying back stock and raising dividends.

PBF Energy

PBF is one of the largest independent energy refiners in the U.S. It operates six refineries as well as pipelines and storage. There are two potential catalysts for investors.

First, PBF dedicated 2023 to repairing its balance sheet - paying down debt and covering environmental liabilities. It now has around $1.4 billion in cash against $1.2 billion of debt. That positions the company to boost shareholder returns via share buybacks and dividends, CFO Karen Davis said on the company's first-quarter earnings call. PBF pays a 2.3% dividend yield, and will continue to buy back stock.

The second potential catalyst lies abroad. If geopolitical tensions disrupt refining operations or shipping, PBF and other U.S.-based refiners should benefit.

Cook at Hennessy is worth listening to because both of his funds top their rivals over the past three and five years, according to Morningstar Direct. Here's what he's saying about energy stocks:

1. Recession fears have knocked energy stocks down to attractive levels: Investors have sold energy stocks since April as concerns grow about an economic slowdown or recession. Both the Energy Select Sector SPDR exchange-traded fund XLE and the SPDR S&P Oil & Gas Exploration & Production ETF XOP are down since April 5 while the S&P 500 Index SPX has gained.

"With the recent pullback, energy names are starting to look attractive in terms of valuation," Cook says. Share prices reflect valuation estimates that price oil in the high $60 to low $70 per barrel range. But West Texas Intermediate (WTI (CL00) (WBS00)) crude and Brent oil both trade in the low- to mid-$80s per barrel. Cook thinks WTI will trade in the $80-$85 range for the rest of the year and next. "Most energy producers do pretty well with those prices," he says.

2. OPEC will continue to support oil prices: Demand for crude should remain favorable in part because of continued economic strength, Cook says. On the supply side, he predicts that U.S. production growth will remain muted, and the Organization of the Petroleum Exporting Countries (OPEC) will continue to restrain supply to support prices.

3. The AI boom will turn investors more bullish on energy stocks: A year ago, many investors thought renewables would soon drive down oil and natural gas consumption. But AI has changed that, given how much electricity server farms use. "Now there is recognition that the growth rate in electricity demand will necessitate expansion in all forms of energy," says Cook.

4. Investors need to diversify away from tech: Much of the S&P 500 gains have been driven by big advances in a few megacap tech names. This has left a lot of money managers with big concentrated positions in these stocks. "There is a need for portfolio managers to broaden out," says Cook. One place they might go is energy.

5. Natural gas demand will remain strong: Forward pricing in futures markets suggests natural gas (NG00) will trade above $3 per 1,000 cubic feet, on average, for the rest of this year, and up to $3.70 or higher next year, compared to around $2.70 now. Hot weather this summer will drive demand for cooling. Storage is relatively light. Liquid-natural-gas exports could double over the next six years. All of this suggests natural-gas's price strength, which will help energy companies.

Michael Brush is a columnist for MarketWatch. At the time of publication, he owned XOM, NVDA, GOOGL, MSFT, and AAPL. Brush has suggested OXY, GS, XOM, NVDA, GOOGL, MSFT, and AAPL in his stock newsletter, Brush Up on Stocks. Follow him on X @mbrushstocks.

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-Michael Brush

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06-29-24 1255ET

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