By Nathan Slaughter
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Buffett’s Favorite Energy Stock
Two Companies from One
And a Dividend to Boot
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Editor’s Note: In today’s Cabot Wealth Advisory, you’ll hear from Nathan Slaughter editor of StreetAuthority’s Scarcity & Real Wealth. Nathan discusses Warren Buffett’s favorite energy stock and how you can buy it for less than he paid. I hope you enjoy his issue!
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Right now, you can buy Warren Buffett’s largest oil and gas holding ... for cheaper than he did.
Buy Buffett’s Favorite Energy Stock ... For Less Than He Paid
A chance like this doesn’t come around often ...
As the world’s most-followed investor, Warren Buffett is watched like a hawk. Investors everywhere intently follow his every move, ready to imitate his next play.
So under normal circumstances, if Warren Buffett buys a stock, “copy-cat” investors rush to join him ... dramatically pushing up the stock price.
But I think you’ll agree that these aren’t normal circumstances. There’s a debt crisis in Europe, S&P credit rating downgrades in the United States and abroad, and the threat of another recession has recently plagued financial markets. As nervous investors frantically withdraw their money from the market, stocks of all kinds have gone on sale.
Even Buffett’s portfolio hasn’t weathered the storm untouched. In fact, one of his holdings, ConocoPhillips (COP) fell over 15% from the beginning of the sell-off through September.
This pullback creates a unique opportunity. You see, Warren Buffett’s Berkshire Hathaway (BRK-B) owns about 29 million shares of COP, and though he sold off some of his shares in the last quarter, it is still his largest oil and gas holding.
He started buying the stock in 2005, with a cost basis around $70 a share. But thanks to the sell-off, it’s now trading closer to $68.
That means you can pick up the Oracle of Omaha’s favorite energy stock for less than he paid for it.
But is it worth it? After all, Buffett started buying more than five years ago, and a lot has happened since then.
Simple answer ... I believe it is.
ConocoPhillips is a company that doesn’t need much of an introduction. The integrated global “super major” is the world’s third-largest publicly traded oil producer, digging up 1.7 million barrels of oil (and gas equivalent) per day in 14 countries around the world.
On the back of higher oil prices since the sell-off in 2008, ConocoPhillips has rebounded nicely. For all of fiscal 2010, the company pocketed $8.8 billion in earnings, up from $4.9 billion the prior year. And just this last quarter COP raked in earnings of $3.4 billion, or $2.41 per share.
Now let me say, ConocoPhillips isn’t likely to wow the market with impressive growth--it’s tough to move the needle when you’re a $94 billion company. But the firm will give you dependable cash flow; having a huge reserve base of more than eight billion barrels of oil takes some of the pressure off.
And it’s slimming down by cutting loose non-core assets. Last year, management committed to unwind its 20% equity stake in Russia’s Lukoil. That, along with other asset sales, has brought in $15.4 billion in proceeds over the past couple of years.
Meanwhile, the company plans to reinvest the proceeds into an $11 billion share buyback program--a move that has grabbed investors’ attention.
But that’s not all ...
Sometime next year, ConocoPhillips plans to split into two companies. One company will consist of its exploration and production (E&P) unit, while the other will be dedicated to its refining and marketing businesses. Under the current plan, investors will receive one share in the new refining firm for every two shares they currently own in the company.
With each company acting independently, they’ll be better positioned to focus on their individual business strategies.
After the split, shareholders will still get the same $0.66 per share quarterly dividend. They will also receive a stake in the firm’s downstream business, which processes 2.4 million barrels of gasoline and diesel per day and sells those products at 10,000 retail outlets in the U.S. and Europe.
On top of the shares in the new refining arm, investors who buy now might also see a nice dividend hike. ConocoPhillips has increased its dividend every year for the past 11 years. At an average annual dividend growth rate of 12%, I expect to see further increases as well.
And the shares already offer a healthy dividend. With a current yield close to 4%, ConocoPhillips is the highest yielding stock among major U.S. oil companies. By comparison, Chevron (CVX) pays 3.2%, and Exxon Mobil (XOM) offers a mere 2.4%.
However, like all stocks centered on natural resources, ConocoPhillips is subject to commodity risk. If the price of oil falls, then COP could fall with it. But though it’s possible, I don’t think it’s likely. Now that recessionary fears are easing somewhat, oil looks to have stabilized. After all, it’s one of the most valuable and in-demand resources on the planet.
And with COP trading cheaper than what Buffett paid for it, I think this could be one of the best opportunities we’ve seen yet.
Good investing!
Nathan Slaughter
Editor, Scarcity & Real Wealth
P.S. My team and I have been researching the natural resources stocks owned by the world’s billionaires. It turns out that ConocoPhillips is just one of the dozens of natural resource stocks that billionaires like Warren Buffett own. Bill Gates, Carlos Slim, and dozens more of the world’s richest people have been snapping up natural resource stocks for years. To find out more information about their holdings--including several names and ticker symbols of what they’re buying--visit this link.