Many investors are increasingly hesitant to hold shares of oil and gas companies as a global energy transition gathers steam. Not Warren Buffett.
What’s happening: Buffett’s Berkshire Hathaway just disclosed a new stake in Chevron (CVX), the second largest oil firm in the United States.
The $4.1 billion investment could have been spearheaded by Berkshire investment managers Ted Weschler and Todd Combs. But Buffett still runs the show, and it’s a sign that the world’s most famous investor sees long-term value in a sector that’s taking plenty of heat.
Chevron (CVX) shares plunged to their lowest level since 2006 when the pandemic destroyed oil prices last March, and they’ve failed to fully recover. The company posted a net loss of $5.5 billion for 2020, and its stock is now trading at $93.13, 15% lower than one year ago.
The case against investing in Big Oil companies like Chevron is building as countries and businesses work to limit emissions by pivoting to greener energy sources.
European oil majors have been racing to jump on the bandwagon before it’s too late. Last week, Shell (RDSA) announced that its oil production has peaked and will now fall every year as it weans itself off fossil fuels. Meanwhile, Wall Street is raising its climate standards. On Wednesday, BlackRock (BLK) — the world’s biggest asset manager — told companies that said it would seek to remove directors of companies that don’t provide “a credible plan to transition its business model to a low-carbon economy.”
Chevron is not moving as quickly as some of its rivals. The company continues to expand its oil footprint, cutting deals like its $5 billion purchase of Noble Energy last year. It has not made major investments in solar and wind beyond supporting its own power needs — and CEO Michael Wirth recently indicated to my CNN Business colleague Matt Egan that is unlikely to change.
That means a bet on Chevron is a bet that oil demand will fully recover from Covid-19 and remain elevated for decades to come, despite growing public pressure. That’s possible, but no longer seen as a given.
There are factors working in Chevron’s favor. US oil prices climbed back above $60 per barrel this week for the first time since January 2020, and there’s chatter this could be the start of another “super cycle,” with limited production and a burst in post-pandemic demand generating an explosion in prices.
Buffett has previously expressed his faith that the United States will launch a robust recovery, and falling infections could finally allow a strong rebound to take hold in the second half of the year.
Chevron also looks like drama-lite alternative to rival ExxonMobil (XOM), which has in recent months been targeted by activist investors pushing the company to change its strategy.
Perhaps the Oracle of Omaha’s gamble will pay off. But even with Buffett’s vote of confidence, it’s clear the road ahead won’t be easy.
Sorry, America: China is now Europe’s biggest trading partner
Europe is now trading more with China than the United States, a sign of how the pandemic is dramatically transforming the global economy.
Details, details: Data released this week by Europe’s statistics service attributed the shift to a 5.6% increase in imports from China and a 2.2% increase in exports. Meanwhile, there was a “significant drop” in trade with the United States, with imports plunging 13.2% and exports falling 8.2%.
China’s economy expanded 2.3% in 2020 as it raced to recover from the pandemic, while the United States saw economic output shrink 3.5%. That allowed China, the world’s second largest economy, to increase its global clout.
The European Union shares many US concerns about China’s practices regarding trade and technology, having previously said that it considers China to be a “strategic competitor” and a “systemic rival.” But Brussels is still looking to deepen trading ties.
Late last year, Europe finalized an investment agreement with Beijing aimed at boosting market access. The European Commission said it laid down “clear obligations on Chinese state-owned enterprises,” which are often heavily subsidized, and established rules against forced technology transfers.
Nonetheless, the deal generated friction with the United States. Jake Sullivan, who is now President Joe Biden’s national security adviser, urged EU leaders to wait and address shared concerns about Beijing with the incoming administration. They didn’t.
Why it matters: Biden is trying to reset relationships with allies and build a global coalition to hold China to account. Trading dynamics that emerged during the pandemic era could complicate those efforts.
Citi can’t get back $500 million it wired by mistake
What a federal court has dubbed one of the “biggest blunders in banking history” doesn’t appear to have a happy ending for Citigroup (C).
A US District Court judge ruled Tuesday that the New York bank won’t be allowed to recoup hundreds of millions of dollars it accidentally wired to Revlon’s lenders last year.
The backstory: Citi, which was acting as Revlon’s loan agent, meant to send about $8 million in interest payments to the cosmetic company’s lenders. Instead, it accidentally wired almost 100 times that amount, including $175 million to a hedge fund.
Citibank filed a lawsuit in August, and is seeking the return of $500 million that hasn’t been paid back. But the judge said that the transfers didn’t have to be reversed, since the lenders were justified in believing the payment was intentional.
“To believe that Citibank, one of the most sophisticated financial institutions in the world, had made a mistake that had never happened before, to the tune of nearly $1 billion — would have been borderline irrational,” the court document said.
Citi disagrees, and said it intends to appeal. “We believe we are entitled to the funds and will continue to pursue a complete recovery of them,” the bank said in a statement.
The takeaway: We all have fat fingers sometimes. But some mistakes are costlier than others.
Hilton (HLT) reports results before US markets open. Baidu (BIDU), Hyatt (H) and Tilray (TLRY) follow after the close.
Also today: US retail sales for January arrive at 8:30 a.m. ET, followed by industrial production data at 9:15 a.m. ET. Minutes from the Federal Reserve’s January meeting post at 2 p.m. ET.
Coming tomorrow: The House Financial Services Committee holds a hearing on GameStop mania. Robinhood CEO Vlad Tenev, Citadel CEO Ken Griffen, Melvin Capital CEO Gabe Plotkin and Reddit CEO Steve Huffman are all scheduled to testify.