After months of quiet browsing, Warren Buffett has finally found something worth buying.
Berkshire Hathaway (BRK/B) on Sunday announced an agreement to buy Dominion Energy’s (D) 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 (AMNA) has lost almost 50% of its value while the S&P Utilities Select Sector Index (.IXU) 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 (UNP), CSX Transportation (CSX) and Norfolk Southern Railway (NSC) —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 (TRP) and Enbridge (ENB) 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.
|For more news you can use to help guide your financial life, visit our Insights page.|