(GuruFocus) Throughout his long and storied career, Warren Buffett has invested in thousands of businesses, covering virtually every sector and industry. However, there is one sector that he has tended to stay away from.
The Oracle of Omaha has only made a handful of investments in the oil sector during his career. His oil purchases include China National Offshore Oil Company, Oil and Gas Property Management (1957) and ConocoPhillips, which resulted in a mixed record.
He's also owned oil and gas infrastructure assets such as pipelines and refineries. However, for the most part, he has stayed away from the industry because it is so unpredictable.
Before Buffett makes an investment, he sits down to work out how much the company is worth. He can only do this if he can predict, with a reasonable degree of certainty, the business's cash flows for the next five, 10 or 20 years. Because hydrocarbon prices are so volatile, you just can't do that with oil and gas companies.
Still, as I noted above, Buffett is willing to invest in oil and gas businesses if the price is right. In fact, both Buffett and his right-hand man, Charlie Munger, both citied oil companies as being some of the most "fun" personal investments they've ever made at the 2019 annual meeting of Berkshire Hathaway shareholders.
The most "fun" investment
The duo was asked if they could talk about the most interesting or "fun" personal investment they've ever made. Buffett said his was the Atled Corp:
"I bought one share of stock in the Atled Corp. That's spelled A-T-L-E-D. And Atled had 98 shares outstanding and I bought one...a hundred guys in St. Louis had each chipped in 50 or $100 or something to form a duck club in Louisiana and they bought some land down there...and they went down to Louisiana and they shot some ducks. But apparently somebody fired a few shots into the ground and oil spurted out...think the Delta duck club field is still producing."
Buffett went on to explain that when he bought the stock four decades ago, it was worth $29,200 a share with "that amount in cash." It might have been worth as much as $3 million a share if the owners hadn't decided to sell out to a larger oil group.
As well as uncharacteristically investing in an oil business, Buffett also broke another of his investing rules by borrowing to buy the shares. "I didn't have any cash at the time," he explained earlier this year. So he "went down" to the bank and "borrowed the money."
Munger's most "fun" investments were also oil-related:
"Well, I got two investments that come to mind. When I was young and poor, I spent a thousand dollars once buying an oil royalty that paid me $100,000 a year for a great many years. But I only did that once in a life time.
On a later occasion, I bought a few shares of Belridge Oil, which went up 30 times rather quickly. But I turned down five times as much as I bought. It was the dumbest decision of my whole life. So, if any of you have made any dumb decisions, look up here and feel good about yourselves."
What I find fascinating about both of these examples is that they are both relatively speculative investments. Buffett and Munger, who are considered to be some of the most conservative investors around, took large risks with illiquid, risky oil bets, which they consider to be some of the most exciting investments of their careers.
Still, considering how many oil and gas businesses collapse before they ever generate a return for investors, it is probably better to avoid the sector altogether. The risks are stacked against you.