Warren Buffett, the so-called Sage of Omaha, is one of the world’s most closely watched investors. This is because he has consistently delivered market-beating returns through Berkshire Hathaway over more than half-a-century. Buffett specialises in buying companies that are unfairly unloved by stock market investors. He has patience and is prepared to wait for his investments to pay off. Buffett has been sitting on the sidelines, on a large cash reserve, as the Covid-19 containment measures have wreaked havoc on businesses. As the Wall Street Journal reveals, Buffett seems to have got his appetite back and has bought a stake in an energy business that is shifting focus to utilities. – Editor
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Warren Buffett’s bet is a midstream buying signal
By
Berkshire Hathaway on Sunday announced an agreement to buy Dominion Energy’s midstream energy business for $9.7 billion including debt as Dominion shifts its focus to utilities. The purchase is right in Mr. Buffett’s wheelhouse: an old, out-of-favor sector he knows well.
It probably is no coincidence that Dominion chose to unveil the deal alongside an announcement bidding farewell to its six-year-old Atlantic Coast Pipeline project, which it said faces too much regulatory uncertainty. Such concerns have dogged many high-profile projects. Notably, a federal court Monday ordered the Dakota Access Pipeline to shut down pending an environmental review.
For Dominion, it is a decisive shift away from the oil-and-gas business. Investors don’t seem convinced: While Berkshire’s shares rose 2%, Dominion’s sank 11%.
The deal’s timing might show that Mr. Buffett sees a silver lining in the regulatory headaches: More barriers for new pipeline build-outs could mean better value for existing ones. The pace of pipeline build-outs has long lagged behind the production of oil and gas; even with reduced production recently, pipelines will likely have plenty of business going forward. The acquisition also includes a 25% stake in the only operating liquefied-natural-gas export terminal on the East Coast.
Midstream companies—despite some contracted cash flow—have lagged behind utilities badly. Since its inception in 2013, the Alerian Midstream Energy Index has lost almost 50% of its value while the S&P Utilities Select Sector Index rose by that amount.
Consider another Buffett bet on a sagging sector: In the 12 months before he announced the 2009 purchase of railway BNSF, its three Class 1 competitors—Union Pacific, CSX Transportation and Norfolk Southern Railway—had an average total return of negative 10%. They returned nearly 50% over the following 12 months. Mr. Buffett dubbed the purchase an “all-in wager on the economic future of the United States.”
Share prices of midstream companies such as TC Energy and Enbridge fell slightly Monday, probably reacting to the unfavorable Dakota Access ruling. While caution is warranted, Mr. Buffett’s vote of confidence shines a light on the beaten-up sector’s value.
Write to Jinjoo Lee at [email protected]
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