Warren Buffett's Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B) is an excellent source for stock ideas. After all, if a stock passes the scrutiny of Buffett and his team, it means they deemed it a better investment than buying back their own stock or staying in cash. It's a commanding badge of honor. And Berkshire's long-term outperformance backs up why investors still look to the Oracle of Omaha for ideas.
Berkshire Hathaway Energy is one of the most valuable subsidiaries of Berkshire Hathaway. However, Berkshire also owns stock in a few top energy companies.
Three that stand out are Chevron(NYSE: CVX), Occidental Petroleum(NYSE: OXY), and Vitesse Energy (NYSE: VTS). Here's why all three dividend stocks are worth buying now.
Image source: Getty Images.
This top Buffett holding is undergoing a sustained rebound
Daniel Foelber (Chevron): After being the worst-performing sector in 2020, energy became the best performer in 2021 and 2022 -- producing a staggering 152.5% return in that two-year time frame. The epic rally was driven, in part, by depressed valuations in top names, especially relative to the rest of the market. There was even a point in 2020 when Zoom Video Communications was somehow worth more than one of the world's most powerful integrated oil and gas majors, ExxonMobil. It's probably the most telling chart out there of how overvalued growth stocks were relative to energy. Today, ExxonMobil is worth 22 times Zoom.
XOM Market Cap data by YCharts
But Berkshire Hathaway doesn't own ExxonMobil. It does, however, have a massive position in Chevron. And there's reason to believe Chevron is, arguably, the best all-around oil major.
Chevron has an excellent track record of being a well-run, well-managed company. It starts with CEO Mike Wirth, who isn't afraid to back down from an overpriced deal or stick his neck out when so many competitors are too afraid to take action.
Overall, Chevron is a very defensive oil and gas company. It maintains the best balance sheet of the majors, offers a sizable 3.8% dividend yield, buys back a boatload of stock when it can afford to do so (like now), and has a diversified business, both geographically and by segment.
Even after the big rally over the past couple of years, the energy sector is up 3% year to date. And while that may be lagging behind the performance of the S&P 500, it's an encouraging sign that there's support for sustained growth in oil and gas, in part because of a heightened focus on energy security. Oil and gas are established and reliable. Plus, many oil and gas companies, especially integrated majors like Chevron, have spare cash to reinvest and diversify toward lower-carbon alternatives, whereas many renewable developers have to borrow money at high interest rates, making it harder to justify expansion.
The environmental impact of oil and gas remains the industry's biggest threat. But the energy transition takes time. And for now, the world still depends heavily on oil and gas for key industries such as power generation, transportation, and industrial, commercial, and residential applications.
Chevron sits in a commanding position. For the reasons discussed, it's the exact kind of company Berkshire looks for. And it's one worth owning now.
An energy stock that's sitting in the bargain bin
Scott Levine (Occidental Petroleum): With more than 224 million shares in its portfolio, Berkshire has a sizable position in Occidental Petroleum. In fact, the 25% ownership stake that the Oracle of Omaha has in Occidental makes it the sixth-largest holding in the Berkshire portfolio. Those seeking the reassurance of a Buffett-approved stock, therefore, would be wise to consider energizing their portfolios with Occidental -- especially since the stock is inexpensively valued. Currently, shares of Occidental are trading at 10.8 times trailing earnings, representing a discount to both their five-year average P/E ratio of 13 and the S&P 500's P/E ratio of 25.6.
Operating in the Permian Basin, Occidental brandishes itself as "one of the largest oil and gas producers in the United States." The company also operates upstream assets throughout the Middle East. But the company is involved in more than just exploration and production; besides the company's chemicals business, it also maintains midstream activities.
In addition to some energy exposure, investors gain a sustainable dividend in picking up shares of Occidental Petroleum -- one well covered by the company's strong free cash flow generation.
OXY Dividend Per Share (Quarterly) data by YCharts.
Further reassurance in the company's ability to maintain its dividend is demonstrated by the company's financial health. In May, Fitch Ratings upgraded Occidental's credit profile to investment grade; moreover, the company stated in its recent financial-results presentation for the second quarter of 2023 that it believes it can maintain its payout to shareholders as long as the benchmark, West Texas intermediate, stays at about $40 per barrel.
A Buffett holding with an 8.3% dividend yield
Lee Samaha(Vitesse Energy): The global economy is slowing, China's economic recovery from a period of lockdowns has been slower than most expected, and ongoing investment in renewable energy continues to threaten the long-term future of traditional fossil fuels as an energy source.
But it's also true that the price of oil remains above $80 a barrel while leading oil exporters like Saudi Arabia and Russia continue to be willing to make production cuts to support the oil price, while the Biden administration has run down the U.S. Strategic Petroleum Reserve to levels not seen since the 1980s.
That's why it makes sense to look at Berkshire Hathaway holding Vitesse Energy. It's a relatively conservative way to get exposure to oil, as the company isn't an owner/operator. Instead, Vitesse's management uses its expertise to identify and invest in wells operated by other oil companies. In addition, Vitesse hedges a portion of its oil production to reduce the risk of a falling price of oil. It's an imperfect science that won't fully protect investors from a crashing oil price, but it does help reduce volatility.
Currently sporting an 8.3% dividend yield, Vitesse is a helpful option for income-seeking investors who want oil exposure and understand the bull and bear cases for the stock.
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Daniel Foelber has the following options: long January 2024 $145 calls on Zoom Video Communications and short January 2024 $150 calls on Zoom Video Communications. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, Vitesse Energy, and Zoom Video Communications. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.
