Buffett Sees Value In Oil, Invests In XOM

According to Berkshire Hathaway Inc.’s (BRK.A) (BRK.B) most recent 13F filing, Warren Buffett’s company has made a $3.7 billion investment in the world’s largest publicly traded oil company, Exxon Mobil Corporation (XOM).

Buffett is well known for cherry picking investments and considers Exxon Mobil as a phenomenal investment opportunity. It is one of the most efficient integrated oil explorers, given its track record of superior return on invested capital. It has also maintained the trend of continual dividend increase for the past 31 years.

Exxon Mobil’s third quarter performance reflects continued progress across a diverse set of profitable growth opportunities, positioning it well to deliver shareholder value. The company expects production to grow 2-3% per year during the 2013-17 period. Planned capex of around $185 billion over the next five years, excellent financial health with an AAA credit profile and diversified operations across the globe with several new projects expected to come online through 2013 posit Exxon Mobil as a value investment.

This wager by Buffett also comes across as a vote of confidence for the oil and gas sector. Demand for energy is expected to grow. Macro trends such as a better-than-anticipated October jobs report, positive data about China’s trade, better- than-expected third quarter GDP growth rate, sector all pointed towards higher demand trajectory.

The Energy Information Administration (EIA) in its most recent Short-Term Energy Outlook stated that it expects global oil demand to increase 1.1 million barrels per day in 2013 and a further 1.2 million barrels per day in 2014.

Buffett, however, reduced his holding in another oil major, ConocoPhillips (COP) to 13.5 million shares at the end of September from 24.2 million shares in June. This investment came at a time when oil and gas prices were nearly peaking and thus the move failed to produce adequate returns.

Other portfolio changes include the addition of 0.2 million shares of Suncor Energy Inc. (SU) and 0.8 million shares of U.S. Bancorp (USB). Buffett shed 1.15 million shares of GlaxoSmithKline plc (GSK) which has been accused of bribery in China and is also facing patent expiration of its niche drug Advair. The portfolio also cut bets on Sanofi by 0.2 million shares.

Berkshire Hathaway and Exxon Mobil both currently retain a Zacks Rank #3 (Hold).