Well, it finally happened.
Warren Buffett put some of his massive cash hoard to work. He spent nearly $10 billion buying Dominion Energy’s natural gas pipelines and storage assets.
Berkshire Hathaway, Buffett’s holding company, agreed to a $4 billion purchase of Dominion’s natural gas assets. It took on another $5.7 billion in the company’s debt.
Given the Oracle of Omaha’s reluctance to buy anything these days, this is making headlines. It marks his first significant purchase since the COVID-19 outbreak started. It’s his largest acquisition since his 2016 purchase of aerospace company Precision Castparts.
The financial press pores over every move Buffett makes — and picks each one apart for clues.
So, today, we’re playing Monday morning quarterback (technically Tuesday morning, I suppose).
We can glean insights from Buffett’s latest buy.
It Wasn’t THAT Much Money — to Buffett
Sure, $10 billion sounds like a lot of money.
But Berkshire Hathaway had over $137 billion in cash on its balance sheet as of last quarter.
And Warren Buffett’s big bets dwarf $10 billion.
He spent $37 billion on Precision Castparts and $44 billion to buy railroad Burlington Northern Santa Fe.
So, taken alone, we shouldn’t draw major conclusions that Buffett is “betting big” on energy infrastructure. But it’s an interesting buy for a couple of reasons.
All About Moats
Warren Buffett has said for years that he likes businesses with “moats” that protect them from competition. For example, it’s hard to compete with Coca-Cola in soft drinks. Building the size, scale and brand recognition are just about impossible.
Natural gas pipelines are anonymous metal tubes. There’s not a lot of branding there. But they do have competitive moats.
Getting permission to build a pipeline is tough these days due to environmental protests and government pushback. That makes the position of existing pipelines stronger.
And pipelines are natural monopolies. Once a pipeline serves a given area, it doesn’t make sense to build more.
Our economy gets greener with every passing day. But the natural gas in these pipelines is part of that greening process. It burns cleaner than coal and petroleum.
Wind and solar energy will make up a bigger slice of the pie. But natural gas will be with us for the foreseeable future.
Be Greedy When Others Are Fearful
Warren Buffett is a natural contrarian. In his own words, the secret of his success is to be greedy when others are fearful and fearful when others are greedy.
Well, most investors are terrified today of pipeline stocks:
- The sector has been under pressure since 2015.
- It’s unpopular with younger investors.
- And it’s under constant attack from political opponents.
This is precisely the kind of setup a value investor lives for.
I don’t have $10 billion to plow into cheap pipelines these days, and I’m betting you don’t either. But the good news is that we don’t have to.
Some of the largest pipeline operators, such as Enterprise Products Partners (EPD), trade today at prices first seen a decade ago.
We’ll watch to see if Mr. Buffett follows his pipeline purchase with bigger investments in public pipeline stocks.