In a US regulatory filing this week, legendary investor Warren Buffett disclosed he had dumped his entire 41 million shareholding in oil supermajor Exxon Mobil (NYSE: XOM.US), during the fourth quarter of last year when oil prices were cratering.
Buffett’s $3.7bn investment in Exxon Mobil, dating from 2013, had made the company a top 10 holding in the portfolio of his Berkshire Hathaway group.
Following Buffett’s bold move, should UK investors call time on FTSE 100 oil giants BP (LSE: BP) (NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US)?
The first thing I’d say is that Buffett has a patchy record of investing in the oil sector. For example, on one hand he booked a $3.5bn profit when selling out of PetroChina in 2007; on the other, he made what he called “a major mistake” when betting on ConocoPhillips right before crude prices peaked in 2008.
Another thing to note is that we don’t know exactly why Buffett dumped his Exxon Mobil shares. Is he bearish on oil, or bearish on the company, or does he simply see better opportunities for greater returns elsewhere?
Certainly, with billions of dollars under his control, there are factors behind some of Buffett’s decisions that simply don’t apply to smaller investors. Certainly, too, Exxon Mobil’s valuation is markedly different to the valuations of BP and Shell.
Analysts expect oil companies’ earnings to fall by somewhere in the region of a third to a half in 2015. Forecasts put Shell on a P/E of 16.2 (at a share price of £22), BP on a P/E of 19.1 (at a price of £4.45) and Exxon on a P/E of 22.3 (at $91).
Exxon, then, is pricier than its UK counterparts, and remains so if we look out to 2016, where the forecast P/Es are: Shell 12.2, BP 12.9 and Exxon 17.3.
The FTSE firms also appear much superior value to Exxon when we look at dividends. While Exxon’s trailing 12-month yield of 3% isn’t bad for a US company, BP and Shell both boast yields of 5.4%.
Admittedly, analyst forecasts for 2015 mean Shell’s dividend will barely be covered by earnings and BP’s will be uncovered (compared with 1.4x cover for Exxon), but the UK companies’ cover improves with the rise in earnings forecast for next year.
Of course, BP and Shell’s dividends could come under pressure, if analyst earnings expectations for 2016 prove way too optimistic. Even so, though, BP boss Bob Dudley, who expects low oil prices to persist “into the medium term”, seems confident of managing “the new reality of lower prices” with the dividend as “the first priority within our financial framework”. Similarly, Shell boss Ben van Beurden recently told Bloomberg Television: “The dividend is an iconic item at Shell and I will do everything to protect it”.
On balance, given the relatively attractive earnings ratings of BP and Shell compared with Exxon, and their much superior dividend yields, I think if I were a shareholder, I wouldn’t be rushing to follow Buffett’s lead, and selling out of my big oil investments.