Berkshire Hathaway
Warren Buffett

Berkshire Hathaway released its most recent 13-F yesterday afternoon. The information revealed unusual activity in Berkshire Hathaway’s portfolio during the fourth quarter. There was a lot of buying and selling of various positions for a long term investor.

Overall, Warren Buffett was a net seller in the fourth quarter of 2009. This is not surprising since Buffett needed to raise cash to finance the acquisition of Burlington North. Buffett reduced his stake in 11 out of the 41 stocks. The companies Buffett reduced his stake in were CarMax, Conoco Phillips, Exxon Mobil, Gannett, Ingersoll Rand, Johnson & Johnson, Moody’s, Proctor & Gamble, Sun Trust Bank, United Health Group, and WellPoint. He added to several positions such as Wells Fargo.

One of the strangest moves Warren Buffett made was his large decrease in Exxon Mobil stock. Buffett only acquired a stake in the company during the 3rd quarter of 2009. It is very uncharacteristic of Buffett to trade so quickly. There was no significant increase (in fact there was likely a decrease) in the stock price from the time Buffett made the purchase. The sale was not insignificant either; Warren Buffett reduced his stake in Exxon Mobil by approximately 70%.

The move is even more confusing because Buffett had initially only purchased a small stake in Exxon Mobil. Buffett purchased slightly under $100 million worth of shares. Warren Buffett never makes transactions of less than $100 million, leading many to suspect (myself included) that he would be buying more stock of the company over time.

I doubt he reduced his stake in Exxon Mobil to raise cash for the BNI deal as he only had a small stake in the company to begin with. If he wanted to raise cash he would have sold a few more shares of large holdings like Johnson & Johnson and Wells Fargo.

This leads to only two possibilities in my mind: either Warren Buffett is becoming a trader or there was a material change in Exxon Mobil. I highly doubt it is the former and assume it to be the latter.

I have thought of two possibilities of why Warren Buffett made this decision and they both have to do with the big news that hit the wires on December 14, 2009: Exxon Mobil was going to buy XTO energy in a multibillion dollar transaction.

The company announced that it would be purchasing XTO energy for $41 billion which includes $41 billion of existing XTO debt. A large part of the transaction would be financed through issuing stock to the shareholders of XTO. Exxon Mobil has agreed to issue 0.7098 of a share of common stock for each common share of XTO.

Exxon Mobil is not exactly over valued currently. A quick analysis of the company shows that it is trading at 9 times future P/E, and 6.7 times EBITDA. Exxon might be better off issuing debt when interest rates are at zero to finance the deal rather than issuing more undervalued stock. Warren Buffett is no fan of company buyouts with undervalued stock. The main reason Buffett has been so opposed to the Kraft-Cadbury deal is because Kraft is partially financing the deal with its stock. Buffett believes Kraft to be undervalued and is therefore making a mistake by conducting the transaction with so much stock.

The second reason that I believe Warren Buffett is against the deal has to do with the reason Exxon made the offer to buy XTO. According to many analysts the deal is a pure play on natural gas. XTO is one of the largest natural gas producers in the country.

I am not an expert on energy policy, but I see two possibilities for the United States reducing its dependence in oil and coal in the near future; natural gas or nuclear technology. The United States has a huge supply of domestic natural gas. While natural gas does produce carbon emissions, it produces far less than oil or coal which currently the United States is heavily dependent on.

Nuclear power produces zero emissions; however there are many negatives about nuclear technology which I will not get into now. It looks like the Obama administration is taking the nuclear power route: for the 2011 budget, President Obama proposed issuing over $54 billion in loan guarantees to expand nuclear power. Obama recently issued $8 billion loan guarantees recently for two nuclear plants to be built in Georgia (although this happened after Buffett’s sale of XOM; perhaps Buffett saw this coming especially since Obama consults with him on economic policy from time to time). This is a significant move since this could lead to the first nuclear plant being built in America in over three decades.

This is very bad news for natural gas (and other energy sources). If Obama stresses nuclear power while simultaneously Exxon Mobil is hedging its future on natural gas, XOM is in big trouble. This is not a small bet by Exxon Mobil. The company has made an all-in bet worth tens of billions of dollars on natural gas. Perhaps this is another reason why Warren Buffett aggressively sold so much stock in Exxon Mobil.