This Top Warren Buffett Stock Continues to Get Better as It Grows Bigger

Warren Buffett's company, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), has invested nearly $290 billion into a portfolio of publicly traded companies. Oil giant Chevron (NYSE: CVX) ranks in the top five. Berkshire owns 118.6 million shares worth $19.8 billion, which is 6.9% of its investment portfolio.

There are lots of oil stocks Buffett's company could have bought. However, Chevron is his company's top position in the sector for a reason (it's ahead of Occidental Petroleum, Berkshire's sixth-largest holding, at 4.5% of its investment portfolio).

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One likely motivation why Buffett's company owns so much Chevron stock is its focus on getting better as it grows bigger. It recently showcased one way it does that.

Another step toward optimizing its portfolio

Chevron is one of the world's largest oil and gas producers, with assets that span the globe. It invests heavily each year to grow its portfolio through exploration, development, and acquisitions. However, the company's focus isn't to build a massive empire of oil and gas assets. Its goal is to grow shareholder value.

Because of that, Chevron is always looking for ways to upgrade and optimize its global energy portfolio. It will often trim around the edges by selling noncore assets to recycle that capital into growing its best assets.

Chevron took its latest step to improve its portfolio by recently agreeing to sell a 70% interest in its East Texas gas assets for $535 million to one of the largest producers in the region. It will receive $75 million in cash and a $450 million capital carry to fund the drilling of new wells in the region. The deal's structure will generate over $1.2 billion in value for Chevron over the long term through its retained interest in the growing production of this partner-funded development.

The sale is part of Chevron's plan to divest $10 billion to $15 billion in assets by 2028 as it optimizes its global portfolio. Last year, Chevron sold $7.7 billion in noncore assets, including exiting Canada in a $6.5 billion deal.

Growing bigger and better

Chevron is building one of the world's best portfolios of oil and gas production assets. It does that through organic investment and strategic acquisition. The company is investing $15 billion into organic capital projects this year. Most of that money will go toward expanding its U.S. portfolio, including developing its assets in the Permian Basin, DJ Basin, and the Gulf of Mexico (known as the Gulf of America in the U.S.).

This heavy investment should really pay off over the next two years. Chevron expects to generate an additional $10 billion in annual free cash flow by 2026 as it ramps up production on several major projects and development regions. That's a big boost from last year, when it produced $15 billion in free cash flow.

Another big value driver for Chevron is strategic acquisitions. For example, it bought PDC Energy for $7.6 billion in 2023, significantly enhancing its position in the DJ Basin. That deal and organic investment helped fuel 7% production growth last year.

Chevron has been working on an even bigger acquisition in recent years: It agreed to buy Hess for $60 billion in late 2023. The deal will upgrade and diversify Chevron's already advantaged global oil and gas resource portfolio. It would add an extraordinary asset in Guyana and another leading U.S. shale position in the Bakken of North Dakota to Chevron's portfolio. On top of that, the deal would bolster its existing operations in the Gulf and Southeast Asia.

That transaction would enhance and extend Chevron's production and free cash flow growth outlook into the 2030s. While the company has faced a roadblock in closing the megadeal, it's confident it will complete the transaction later this year.

Building a better oil stock

Chevron's desire to grow value for shareholders is likely one of the characteristics that caught the attention of Warren Buffett's company. The oil company will routinely sell noncore assets to invest in higher-quality positions and upgrade its already excellent global resources portfolio. This strategy should significantly boost the company's ability to produce free cash flow over the coming years, which could give its stock price the fuel to rise. Because of that, it could create a lot of value for Warren Buffett's company and investors who follow his lead in buying the top oil stock.

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Matt DiLallo has positions in Berkshire Hathaway and Chevron. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.