Warren Buffett is Back in the Game, Sort Of

By John Banks

Warren Buffett is back in the game, sort of. He is only spending 7% of Berkshire’s $137 billion cash pile, but it’s a start.

In the aftermath of the 2008 financial crisis, Buffett acted boldly. His distressed-asset deals helped support blue chip companies like General Electric, Goldman Sachs, and Bank of America.

This time around, though, Buffett has not been bold. The market saw a panic sell-off in March, and then a historic rebound, and still Buffett didn’t buy anything.

“We have not done anything because we don’t see anything that attractive to do,” Buffett said in May, via teleconference, at Berkshire’s annual shareholder meeting.

The lack of action from Buffett was starting to become a sore point for market bulls, as Berkshire sat on a growing mountain of cash. That didn’t bother Buffett, though.

“If we really liked what we were seeing, we would do it, and [a large acquisition] will happen someday,” he added. Now that day has come, as Buffett has found something to buy.

On Sunday, July 5, Berkshire Hathaway revealed an agreement to buy Dominion Energy’s midstream energy natural gas business, at a cost of $9.7 billion ($4 billion plus $5.7 billion of debt).

Prior to the deal, Dominion had been one of the largest players in midstream energy.

Now it is handing off those assets to Berkshire Hathaway Energy, a unit of the larger Berkshire entity with a $100 billion energy portfolio.

As a result of the deal, Berkshire Hathaway Energy will add nearly 8,000 miles of natural gas transmission lines, with transport capacity of roughly 21 billion cubic feet per day. Whereas Berkshire Hathaway Energy already carried 8% of interstate natural gas transmission in the U.S., when the new deal goes through, it will carry 18%. 

Berkshire will also get a 25% stake in the Cove Point LNG terminal, the only operational liquid natural gas (LNG) export facility on the East Coast (and one of only six in the United States).

Per the usual, Buffett is buying at a price discount. The Alerian MLP index, a benchmark for midstream energy companies, is down about 50% from its best levels of 2019. The price of natural gas is also near historic lows, trading around $1.80 per million BTUs (basic thermal units).

Within 24 hours of announcing the deal, Dominion Energy revealed it is giving up on its Atlantic Coast Pipeline project, a six-year attempt to build a 600-mile natural gas pipeline from West Virginia to North Carolina.

The CEOs of Dominion Energy and Duke Energy, who had partnered on the pipeline project, said in a joint statement that the decision to kill the project hinged on “increasing legal uncertainty that overhangs large-scale energy and industrial infrastructure development.”

For Buffett and Berkshire, an unfriendly regulatory environment is probably a feature, rather than a bug. The harder it becomes to build new pipelines — as a result of environmental opposition and regulatory red tape — the more of a natural “moat” any existing pipeline business will have. 

If Buffett’s instincts are on point, the nearly $10 billion purchase could have an upside comparable to Berkshire’s purchase of the BNSF railroad line in 2009 (albeit on a smaller scale).

When Buffett bought the nearly 78% of BNSF that Berkshire did not yet own in 2009, railroads in general had seen terrible performance in recent years. But the buy turned out to be well-timed, as railroads were at the bottom of an industry cycle. 

We don’t know how Buffett’s new wager will turn out. But in the age of coronavirus, it certainly looks better than airlines or cruise ships or other dubious “recovery” plays. Then, too, if natural gas prices are near a long-term bottom, the $9.7 billion bet could look genius in hindsight.