Buffett’s PetroChina Investment | The Acquirer's Multiple®

During their recent episode, Taylor, Carlisle, and Alex Morris discussed Buffett’s PetroChina Investment. Here’s an excerpt from the episode:

Tobias: I remember PetroChina being– And I’d been sort of interested in Buffet and Munger for about five years by that point when PetroChina happened. And I remember it being a little bit controversial in the sense that it was very– He had just gone through the 1990s where he’d been buying Coca Cola and had that perform very well and all those sort of famous– Amex and all the quality-compounder businesses. And then all of a sudden, he buys this commodity, Chinese commodity oil and gas driller. And it seemed like kind of a shocking move.

I don’t think I really understood what he was doing until even more recently when he bought Oxy. And I think it’s a similar playbook to Oxy where it’s cheap on a unitary basis, but it’s also got that they’ve decided to completely change their capital allocation, where they’re going to pay out X percentage to the investors, buy back some stock, all that sort of thing. And that seems to be those two things together are what really piqued his interest.

Alex: Yeah, I just pulled this up real quick from page 222. At the 2005 meeting, we put about $400 million into it at a value the market cap was roughly $35 billion. This was in 2005, this is last year, it earned $12 billion. So, we bought it at three times and they had bought it again like I think 24 months prior or something like that. So, it worked pretty well, pretty quick. I don’t know what oil prices did during that time, what impact that had on the outcome, but it worked. Yeah, that one worked pretty quickly. I think it was working–

Jake: Worked even faster than he wanted it to, would be my guess actually.

Tobias: Yeah, I was having that problem with Oxy.

Jake: Yeah.

Alex: Yeah, there you go.

Tobias: It’s kind of a tough– I’ve said a few times that I thought Apple was the greatest trade ever just because for a few criteria. One, he was already very well known. Apple’s very well known. It’s the same as that the debate about whether it’s common or uncommon. Apple’s the biggest, best-known company in the world. Consumer products are ubiquitous. Buffett’s very well known. It’s hard to deploy very large amounts of capital into anything. There are lots of funds around that like they would say at $10 or 20 billion dollars, he’s struggling to deploy the capital and here he is just dropping 40 into one position and then goes onto–

Jake: Whatever, 250 or something insane.

Tobias: And it was after a period of time where return on investment capital had been declining pretty materially for Apple for a period there. But I think when they really turned on the buyback machine, combined with maybe a new cycle for something had just about to come out. I don’t know if it was a new iPhone or something like that, but together it just all sort of mooned. Worked really well together.

You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:

Apple Podcasts