Warren Buffett is known for his knack for identifying the diamond in the coal mine. Back in the 2009 crisis, when many too-big-to-fail banks collapsed, Buffett made money by investing in bank preference shares. Hence, when the Oracle of Omaha increased his stake in Suncor Energy (TSX: SU)(NYSE: SU), Wall Street analysts were divided over his investment. While Buffett is known for his Midas touch, he is also known for some investing mistakes. So, is Suncor the Midas touch or a mistake?Â
How Warren Buffett earned money in the 2009 financial crisisÂ
In 2008-2009, the banking industry was in a crisis, as banks had huge exposure to sub-prime mortgages that turned bad. No investor was willing to put their money in banks.
In September 2008, just after Lehman Brothers collapsed, Warren Buffett invested US$5 billion in Goldman Sachs (NYSE: GS). In return for his investments in distressed times, Goldman issued special US$5 billion preferred shares carrying a 10% dividend yield and another US$5 billion worth of warrants to buy 43.5 million common shares for $115 in five years.
This deal looked pretty sweet to Goldman, whose shares were falling, as investors’ confidence fell off the cliff after the Lehman collapse. Goldmanâs stock fell 67% between September and November 2008 to US$53 and then surged almost 230% by September 2009 to US$180. The stock surged, as Buffettâs investment boosted investorsâ confidence in Goldman.
Buffettâs investment paid off in five years (in 2011), as Goldman repurchased its preferred stock for US$5.64 billion and also gave a US$500 million bonus. At that time, he also exercised the warrants and got 13.1 million common shares and $2.07 billion cash from Goldman. After nine years, Buffett sold all his shares in Goldman. He has also offloaded many other bank stocks in the pandemic crisis.
Where is Warren Buffett investing in the 2020 pandemic crisis?Â
In the current pandemic crisis, Buffett has been hoarding cash and selling more than buying. It seems like he has been waiting for the market to crash again. While he exited many bank stocks, airline stocks, and restaurant stocks, he played his bet on energy. His energy bet is similar to his Goldman bet. The oil industry is currently in its worst crisis, with both upstream and downstream operations coming to a halt.
The reduced oil demand has hit retail operations and created excess inventory. To balance demand and supply, OPEC+ has asked oil companies to reduce their production, pushing them into losses. Investors have pulled their money from oil companies. But Buffett is buying into them. In June, he purchased five million shares of Suncor, increasing his investment in the energy company to US$318.36 million. He placed a bigger bet of $10 billion by acquiring Dominion Energyâs natural gas pipeline business in July.
Will Buffettâs energy investment pay off in five years?Â
Suncor stock is down over 65% year to date. Unlike his Goldman bet, Buffettâs investment in Suncor did not revive investor confidence, as his investment is less than 2% of his portfolio. The next two years look bleak for Suncor. Airlines are among the biggest consumers of oil products, as jet fuel is made from crude oil. Until air travel demand recovers, oil prices wonât return to pre-pandemic levels.
In these two years, big oil companies with strong balance sheets will survive. Suncorâs first-half-of-2020 losses have widened to $4.4 billion. It has increased its liquidity to $8.65 billion to withstand the crisis. It is lowering its losses by cutting capital expenditures and operating expenses. Moreover, it is producing higher-value synthetic crude oil barrels to maximize its cash flow.
There is no doubt oil demand will return in the long term. And if Suncor survives the next two to three years, Buffettâs investment could pay off in five years.
Foolish takeawayÂ
The fact that investors donât want to get their hands greasy in oil shows that capital is drying up for the industry. I would recommend staying on the sidelines instead of investing money in Suncor. Jump into the stock price rally, if any, after two years.
