Finance History | ConocoPhillips, 31 December 2008 — Berkshire's Oil-Price Timing Error Cost Billions

At 31 December 2008, Berkshire Hathaway owned 84,896,273 shares of ConocoPhillips, approximately 5.7 percent of the integrated energy company. Berkshire reported a cost of US$7.008 billion in 2008 dollars and a year-end market value of US$4.398 billion. The position was therefore about US$2.610 billion below cost on the reporting date, although that gap was unrealized at year-end. Warren Buffett acknowledged that he had bought a large amount when oil and gas prices were near their peak and had not anticipated their dramatic fall during the second half of 2008. He concluded that the timing mistake had cost Berkshire several billion dollars even if energy prices later rose. The admission separated a view about long-run resource scarcity from the price paid for a cyclical producer at a particular moment. ConocoPhillips' earnings depended on commodity prices, production volumes, refining conditions, reserve replacement, operating costs and the capital required to develop large projects. High oil prices could lift cash generation while simultaneously encouraging investment, competition and demand responses that changed future economics. When prices fell, revenue could decline faster than the industry's long-lived assets and commitments could be adjusted. The 2008 financial crisis added a liquidity dimension because Berkshire wanted cash available for unusually attractive fixed-income investments and other commitments. Berkshire sold portions of ConocoPhillips and several other equity holdings to fund those opportunities while preserving its liquidity cushion. Selling shares below their earlier cost can still be rational when the value of immediate liquidity or a competing investment exceeds the expected value of waiting. At the end of 2010, Berkshire retained 29,109,637 ConocoPhillips shares with a reported cost of US$2.028 billion and market value of US$1.982 billion in 2010 dollars. The smaller holding confirms that the episode was not simply a temporary quotation to be ignored, because portfolio needs led Berkshire to realize part of the setback. The photographed Houston complex is a public street anchor rather than evidence that investment decisions were made inside that site. Its corporate campus represents the asset-heavy operating system whose value remained exposed to commodity cycles and capital discipline. Photo: WhisperToMe, public domain, via Wikimedia Commons.