Betting on oil stocks was Buffett's best decision in the past two years.

Finding the source of wealth from the complex international situation, Buffett spent his whole life proving to the outside world that investment is not a complicated matter. He just needs to find that good company, buy it in the right place, and then hold it for as long as possible. Eventually, time will give a satisfactory return on the investment.

Buffett's "good heart" Chevron Corp announced on January 26th that it expects profits in the fourth quarter of 2022 to hit an all-time high. Against this backdrop, Chevron Corp will implement a $75 billion (508.8 billion yuan) share buyback and raise dividends for 36 consecutive quarters.

In addition, Chevron Corp said it would pay a dividend of $1.51 a share to shareholders on March 10, up 6.3 per cent from a quarter earlier.

It is reported that Chevron Corp's share buyback program will be launched on April 1, the size of the buyback is about 1x4 of the company's market capitalization. In addition to Chevron Corp, another oil giant, Exxon Mobil Corp, announced a month ago that it would expand its share buyback program to $50 billion (339.2 billion yuan) by 2024.

So why can oil majors spend a lot of money on buybacks against the backdrop of crazy layoffs among Silicon Valley Internet companies? Does it mean that there is room for oil investment?

The answer is ultra-high profits.

Oil and gas giants such as Exxon Mobil Corp, Chevron Corp, Shell, TotalEnergies SE and BP P.L.C. made nearly $200 billion in profits in 2022, 50 per cent higher than the annual record set more than a decade ago, according to analysts' forecasts.

This means that the profits of these oil and gas companies will reach an all-time high in 2022.

Even so, some analysts are pessimistic about oil and gas companies' profit forecasts for 2023. Kanjing believes that with the complexity of the global economic environment in the past two years, there has indeed been a relatively large increase in commodities such as oil and gas, and there may also be a slowdown in 2023.

According to Buffett's investment habits, it is not a short-term behavior for Buffett to choose to increase his holdings of oil stocks at the end of his career, so from this point of view, for at least five or six years, oil and gas companies will still maintain sizeable profit margins.

Why Chevron Corp?

Data show that Chevron Corp has risen sharply for two consecutive years, with an increase of 52.01% in 2021 and 60.73% in 2022. Buffett also began to increase his position in Chevron Corp in mid-2021, and then began to buy western oil.

Some analysts believe that Chevron Corp is the most powerful of the world's super-large energy companies, and its balance sheet is better than that of competitors Exxon Mobil Corp and large European competitors such as Royal Dutch Shell.

Not only that, Chevron Corp's dividend yield can reach 5.6%, and with the rise in oil prices, Chevron Corp's dividend level will continue to attract investors to invest.

In fact, the most important thing that Buffett dares to invest heavily in stone in the past two years is that it is difficult to increase production capacity.

As early as 2022, Chevron Corp CEO Mike Wirth said in an interview with the media: "you are thinking about 10-year capital investment and it will take decades to provide returns to shareholders, and the current policy environment is that governments around the world are saying: we don't want these products."

In other words, in the current environment, it is not easy to increase supply by increasing refining capacity, and Biden has attacked oil and gas companies before, but has not solved any practical problems.

According to Wirth, demand in the oil industry is growing much faster than supply.

He also lamented that Chevron Corp had not built an oil refinery in the United States since 1970.

As a result, he also asserted that "the United States will never build new refineries."

Judging from the current situation, Wirth's argument can be verified, because the oil industry is very seriously affected by policy. In the past few years, because of the increase in demand for environmental protection, the demand for petroleum products has been required to reduce, and these oil and gas enterprises are cyclical industries. From this dimension, Buffett chose to invest on a large scale at this time. There is no doubt that it is bought at the beginning of the new cycle.

Chevron Corp as the world's largest energy company, Buffett has no reason not to choose the leader as the focus of the bet.

Continue to buy Western oil

In the third quarter of 2022, Buffett only increased his holdings in Western Oil and Chevron Corp among Berkshire's top 10 holdings.

Buffett made no secret of his preference for energy stocks. At present, Western oil has reached the standard of consolidation. According to the current trend, Buffett will probably continue to increase his position in Western oil in the fourth quarter.

In fact, the story of Buffett and Occidental can be traced back to 2019, when Occidental beat Chevron Corp to buy Anadarko, an oil company, for $76 a share.

To take down the oil company, Western Oil paid a total of $38 billion in cash and took on an additional $17 billion in debt. It was a heavy burden for Western Oil at the time, and it was under these circumstances that Berkshire provided 10 billion dollars in financing support for the company.

Berkshire then acquired 100000 preferred shares of western oil through the financing, with a dividend yield of 8 per cent. In addition, Berkshire received a certified stake in 84 million common shares that bought Western Oil.

For Western oil, preferred stock is expensive and not cost-effective. But under the agreement, Western Oil is allowed to start redeeming these preferred shares by August 2029 on the condition that they receive a return of $4 per share through dividends or buybacks over the past 12 months.

Some media have calculated that Western Oil buys back $1 billion of shares every quarter, reaching that threshold in the first quarter of 2023. Vicki Hollub, chief executive of Western Oil, also said last year that Western Oil could reach the "trigger point of $4 per share" by 2023.

The increasing intensity of buybacks has also led to a sharp decline in the net debt of western oil, which is why Buffett keeps buying. According to western oil financial data and Buffett's preferred stock, Berkshire's stake in western oil has reached 1% of its total equity and is likely to continue to increase in the future.

Judging from the current situation, oil exploration companies and oil and gas giants are focusing on returning record profits to shareholders while controlling spending. This behavior will greatly increase the shareholder value of oil and gas stocks, while attracting most investors.

So Buffett has reason to continue to buy western oil heavily in 2023.

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