ConocoPhillips
Company Overview
ConocoPhillips is a major U.S. oil and gas exploration and production company, one of the world's largest independent petroleum producers. Berkshire's investment in ConocoPhillips is notable primarily as one of the most publicly acknowledged investment mistakes Buffett has made — timed poorly near commodity price peaks.
Investment Story
2008: Large purchase near commodity peak. Berkshire acquired a large ConocoPhillips position in 2008, spending several billion dollars at a time when oil prices were near their all-time highs of approximately $140 per barrel. Within months, oil prices collapsed to $40 per barrel amid the global financial crisis, devastating the share prices of all petroleum companies including ConocoPhillips.
Buffett's acknowledgment. In the 2008 letter, Buffett was direct: "I made a major mistake of commission... Without urging from Charlie or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the latter half of 2008. Even if prices had remained high, however, the purchase price for the stock was far above the underlying economics."
The commodity timing error. The mistake was not buying an oil company but buying near a commodity price peak without adequate margin of safety. At $140/barrel oil, ConocoPhillips was reasonably valued for that oil price. But Buffett's intrinsic value estimate for oil companies should have been made using conservative (mid-cycle) oil price assumptions, not peak-cycle assumptions.
Exit. Berkshire reduced the ConocoPhillips position significantly in 2009-2010, realizing a loss. The experience informed subsequent energy investments — Berkshire's Chevron and Occidental positions (initiated in 2020 when oil was depressed, not when it was at peaks) reflect the lessons learned.
Buffett's Own Words
ConocoPhillips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 7,008 4,398 30,009,591 Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 1,847 1,795 130,272,500 Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.9 4,330 3,498 3,947,554 POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 1,191 91,941,010 The Procter & Gamble Company . . . . . . . . . . . . . . . . . 3.1 5,684 22,111,966 Sanofi-Aventis . . . . . . .
*The Coca-Cola Company ........................ 8.6 1,299 9,650 17,938,100 Conoco Phillips ....................................... 1.1 1,066 1,291 21,334,900 Johnson & Johnson.................................. 0.7 1,250 1,409 6,708,760 M&T Bank Corporation .......................... 6.1 48,000,000 Moody’s Corporation .............................. 17.2 3,315 2,338,961,000 PetroChina “H” shares (or equivalents)... 1.3 3,313 3,486,006 POSCO.................................................... 4.0 1,158 100,000,000 The *
The Coca-Cola Company ........................ 8.6 1,299 12,274 17,508,700 Conoco Phillips ....................................... 1.1 1,039 1,546 64,271,948 Johnson & Johnson.................................. 2.2 3,943 4,287 124,393,800 Kraft Foods Inc........................................ 8.1 4,152 4,059 48,000,000 Moody’s Corporation .............................. 19.1 1,714 3,486,006 POSCO.................................................... 4.5 2,136 101,472,000 The Procter & Gamble Company ............ 3.3 1
ConocoPhillips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 7,008 4,398 30,009,591 Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 1,847 1,795 130,272,500 Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.9 4,330 3,498 3,947,554 POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 1,191 91,941,010 The Procter & Gamble Company . . . . . . . . . . . . . . . . . 3.1 5,684 22,111,966 Sanofi-Aventis . . . . . . .
ConocoPhillips . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 2,741 1,926 28,530,467 Johnson & Johnson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 1,724 1,838 130,272,500 Kraft Foods Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.8 4,330 3,541 3,947,554 POSCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 2,092 83,128,411 The Procter & Gamble Company . . . . . . . . . . . . . . . . . . . . 2.9 5,040 25,108,
Investment Lessons
Commodity businesses must be valued at mid-cycle prices, never peak-cycle. Oil companies are highly leveraged to commodity prices. Valuing them at peak-cycle margins produces intrinsic value estimates that will prove wrong in virtually every case — because commodity prices mean-revert. Berkshire's ConocoPhillips mistake was a specific application of this error: implicitly using $130-140/barrel oil in the intrinsic value estimate, when the correct assumption was something like $60-70 realistic long-run average.
Even experienced investors make timing errors in commodities. Buffett has for decades avoided commodity businesses precisely because they're difficult to value without commodity price predictions. The ConocoPhillips purchase represented an exception to this discipline, made at a moment when energy company valuations and global oil market conditions seemed compelling. Maintaining circle of competence discipline — even when a sector appears attractive — is harder in practice than in theory.