[Business & Issue] Did Buffett Know?... Last Year's Pick 'Chevron' Emerges as Beneficiary of Maduro Arrest

Buffett Bought 750 Billion Won Worth of Chevron Last Year
Expectations Rise for Improved Profitability of U.S. Refiners
Long-Term Benefits Uncertain... "Infrastructure Rebuilding Is Challenging"

AP Yonhap News

Warren Buffett, the world-renowned investor and chairman of Berkshire Hathaway, made a significant bet last year on Chevron, a major U.S. oil refiner, which has now emerged as the biggest beneficiary of Venezuelan oil. Despite a decline in international oil prices last year, Buffett's aggressive investment in Chevron is drawing renewed attention amid the U.S. operation to arrest Venezuelan President Nicolas Maduro. If an influx of low-priced Venezuelan oil begins, profitability for Chevron and other U.S. refiners is expected to improve. However, some analysts caution that the high cost of rebuilding Venezuela's oil infrastructure could make it difficult for these benefits to be sustained over the long term.

Buffett Bought Large Amounts of Chevron Stock Last Year... Now a Beneficiary of Venezuelan Oil

According to the U.S. Securities and Exchange Commission (SEC), Berkshire Hathaway, led by Buffett, purchased $520 million worth of Chevron stock between June and September of last year. As a result, Berkshire Hathaway became a major shareholder with a 6.1% stake in Chevron. More than 70% of Chevron's shares are held by institutional investors, with Vanguard (9.1%), State Street (7.6%), BlackRock (6.9%), and Berkshire Hathaway (6.1%) holding the largest stakes as of the end of last year.

Chevron accounts for 7.1% of Berkshire Hathaway's key holdings, making it the fifth-largest among its portfolio. Although international oil prices fell sharply from the $70 range at the start of last year to the low $60s in the third quarter, Buffett pressed ahead with his investment in Chevron. He described Chevron as a "relatively undervalued, high-quality stock," explaining the rationale behind his large-scale purchase.

At the beginning of this year, Chevron has been highlighted as the company expected to benefit most from the operation to arrest President Maduro. Since U.S. sanctions against Venezuela began in 2017, Chevron has been the only company to maintain its oil operations in the country, fueling expectations that it will be given priority in future U.S. imports of Venezuelan oil. Chevron's share price closed at $159.25 on January 8 (local time), up 4.67% from the start of the year.

Reuters, citing key sources, reported, "Chevron is negotiating with the U.S. government to expand its oil operations in Venezuela. If the expansion is approved, Chevron will be able to secure priority access to Venezuelan oil, including existing crude inventories, for shipment to U.S. refineries."

Venezuelan Heavy Crude Can Be Blended with U.S. Light Oil... "Will Boost Refiners' Profitability"

Reuters Yonhap News

If Venezuelan oil enters the U.S. market at low prices, profitability for Chevron and other American refiners is expected to improve. Analysts note that blending Venezuela's primarily heavy crude with other oils would allow gasoline products to be supplied at lower prices.

According to CNBC, more than 90% of oil produced in the U.S. is light crude from shale oil, which requires blending with heavy crude to produce gasoline, diesel, jet fuel, and other products. As a result, U.S. refiners currently import most of their heavy crude from Canada. The American Fuel & Petrochemical Manufacturers (AFPM) recently reported that "the optimal refining profitability for major U.S. refiners is achieved with a blend of 70% heavy crude and 30% light crude."

Unlike the U.S., most of Venezuela's oil production consists of heavy crude. If Venezuelan heavy crude is imported into the U.S. at relatively low prices, the profitability of American refiners is expected to improve significantly. CNBC added, "Although Venezuelan heavy crude is more difficult to refine, its lower barrel price means that U.S. Gulf Coast refiners, equipped with advanced refining facilities, can expect improved refining margins."

Long-Term Benefits Uncertain... "145 Trillion Won Needed to Rebuild Oil Infrastructure"

AP Yonhap News

However, some analysts point out that the high costs associated with rebuilding Venezuela's oil infrastructure make it difficult to expect long-term benefits. Prolonged U.S. sanctions and political instability have left Venezuela's oil infrastructure severely outdated, making long-term investment inevitable if production is to be increased.

Francisco Monaldi, director of the Latin America Energy Program at Rice University and an expert on the South American oil industry, told CBS News that "Venezuela's current oil production is about 1 million barrels per day, accounting for just 1% of global output. Restoring production to the pre-sanctions level of 4 million barrels per day would require at least 10 years and more than $100 billion (about 145.44 trillion won) in investment."

Bloomberg also reported, "Venezuela's oil infrastructure has been devastated by years of corruption, lack of investment, fires, and theft. Export terminal facilities are so outdated that it takes more than five days just to load crude onto tankers." Lino Carrillo, a former manager at Venezuela's state oil company PDVSA, told Bloomberg, "For U.S. oil companies to seriously consider investing in Venezuela, a completely new parliament would need to be installed and sweeping reforms would have to be undertaken."