Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKB) disclosed in its most recent 13-F filing that it picked up 40.1 million shares of oil and gas giant Exxon Mobil (NYSE:XOM), worth about $3.7 billion at Thursday’s closing price. Shares jumped nearly 2 percent on the news Friday as the markets interpreted Warren Buffett’s investment as a seal of approval for the company. Shares of the company have climbed just 5 percent this year to date, pressured by economic and industry headwinds that have eroded earnings.
In the third quarter, Exxon Mobil reported that earnings fell 18 percent on the year to $7.8 billion. Earnings per share fell 14 percent on the year to $1.79. At a glance, that’s not the best news for one of the largest companies on the planet.
But we’d be fools if a glance was all we gave a company, especially one that Berkshire Hathaway just took a multibillion-dollar stake in. Earnings may be down at Exxon Mobil, but long-term prospects are looking up. To begin, Exxon Mobil is a money machine, generating cash flow from operations and asset sales of $13.6 billion in the third quarter. It is the kind of well-established, successful business that Buffett historically favors with long-term investments. Exxon Mobil stock kicks back a 63 cent dividend, up 11 percent on the year in the third quarter, and the stock has a place in nearly every long-term portfolio.
The company has 4.37 billion shares outstanding, 52 percent of which are owned by institutional investors. Buffett’s purchase makes him the eleventh-largest holder. The largest institutional owners of Exxon Mobil stock are Vanguard Group with 224.9 million shares and State Street with 184.4 million shares. The only investor to add a larger stake than Berkshire Hathaway in the third quarter was Fruth Investment Management.
One thing that may have been a factor in Berkshire Hathaway’s decision to invest in Exxon Mobil stock is that shares took a beating during the third quarter. Shares fell below $87 in August (they closed Thursday at $93.22), which would have been a good time to buy. Over the past few years, the stock has generally traded sideways, offering little growth as the oil and gas industry undergoes a rapid evolution.
That evolution has primarily been driven by the natural gas boom in the United States. Exxon Mobil is the largest producer of natural gas in the U.S., but this title is a mixed blessing. Because of the boom, natural gas prices have been held down in the U.S. to about $3.15 per thousand cubic feet as of November. In Europe, prices are more than three times that at more than $10/mcf, and in Asia, prices are higher than $15/mcf.
Exxon Mobil’s position at the head of what could soon become a major export industry for the U.S. is certainly attractive.