Warren Buffett has finally made an investment but it is not the elephant sized investment we were looking for. Berkshire Hathaway $BRK.B acquired some of the midstream natural gas assets of Dominion Energy $D for $9.4 billion. The deal will be done by Berkshire Hathaway Energy in a $4 billion cash transaction and $5.5 billion debt transfer.
In the assets that Berkshire Hathaway Energy is buying, we have natural gas pipelines and some storage facilities, most of which are in the Eastern part of the US. Right now, Berkshire Hathaway Energy has most of their midstream businesses in the central part of the US. This acquisition will be good for their business. Berkshire Hathaway Energy is also a utility company and they also want to have exposure to midstream oil and gas.
This is not what Dominion Energy wants. Dominion Energy is selling all its oil and gas businesses to become fully an utility company. In the future, they want to be 100% renewable and nuclear.
The deal was probably done by Greg Abel rather than Warren Buffett himself since Greg Abel has full autonomy in managing Berkshire Hathaway Energy. Of course, he had to ask for the cash from Warren Buffett. In his last letter to shareholders, Warren Buffett talked about a deal that Ajit Jain, CEO of Berkshire Hathaway insurance businesses, made in 2012. The ROI is already 379%. Just like Ajit Jain, Greg Abel too has the liberty to make deals for Berkshire Hathaway and I believe that both of them will be able to lead the company after the retirement of Warren Buffett. This is a good deal from Greg Abel if we're going to have higher natural gas $NATGAS prices in the future.
According to oil and gas investor T. Boone Pickens, natural gas is the bridge fuel. The US is already the number one natural gas producer in the world and they don't have to rely so much on Saudi Arabian oil anymore. Natural gas is also the least polluting of the fossil fuels. In the coming years, we can expect higher demand for natural gas and consequently higher prices. Investing in a midstream company reduces the risk for Berkshire Hathaway Energy.
Is it a good deal? From the company presentation and from my own calculations, we can see that those assets are expected to have an operating income of $750 million this year. If Berkshire Hathaway is paying $9.4 billion, that's an operating PE of 12.5. Competitors such as Kinder Morgan and Williams Companies have operating PE of about 9. With the premium on the deal, I think it is a good one. We also need to consider the future when we have higher natural gas prices.
This is not a deal available to the average retail investor but we can learn a few things from it. For example, buy low and sell high. Everybody is bearish on natural gas right now. This is the time to buy. We should also not overpay. I'm sure if the operating PE would have been over 20, Greg Abel would not have agreed to the deal. Delegation is also important in business as we can see here, Greg Abel doing a $10 billion deal. Berkshire Hathaway is more than just Warren Buffett and the future of the company looks great.
Is Berkshire Hathaway going to beat the S&P 500 $SPX500 over the long-term? I believe it still can since the stock is undervalued with an overvalued market but we cannot know when this recovery will start. For the time being, I still have Berkshire Hathaway in my watchlist.
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