Oil, oil everywhere — and Berkshire Hathaway is quickly moving to control an even bigger share of the out-of-favor energy commodity.
With the price of crude oil down more than 70 percent since the middle of 2014, many companies connected to the black stuff are under severe pressure. Production in some U.S. fields has been curtailed, and there’s even talk of coming bankruptcies by drillers if prices continue to fall.
That hasn’t seemed to scare off Berkshire Chairman and Chief Executive Warren Buffett — instead, he’s stocking up while the stock prices of oil-connected companies are battered.
Regulatory filings last week by Omaha-based Berkshire Hathaway show the conglomerate is diving even deeper into the crude pool. The latest investment in the company’s portfolio of stocks worth $117 billion at the end of 2014 is Houston-based Kinder Morgan, operator of energy-storage terminals nationwide and an 84,000-mile network of oil and natural gas pipelines.
According to filings with the U.S. Securities and Exchange Commission, Berkshire Hathaway on Dec. 31 owned a new stake in Kinder Morgan of 26.5 million shares — worth about $400 million at year’s end.
The new stake in the energy business by Berkshire Hathaway comes as others are shunning such investments. The price of crude oil has fallen so precipitously because of a major supply glut: Global production is outpacing demand by about 2 million barrels per day.
That has been welcome news for consumers, who are paying about $1 less for a gallon of gas than they were just over a year ago.
But it has been awful news for the energy business — including Kinder Morgan, whose stock has fallen about 65 percent from its high last year of about $45 a share.
That’s just the kind of environment where Buffett and Berkshire can sniff a possible deal: As the company has done many times in the past, Berkshire has been more than willing to buy what others are willing to throw on the discard pile.
“Berkshire’s interest in energy is clearly driven by the current level of energy prices, which have fallen materially over the last 18 months, with oil going from roughly $100 a barrel to about $30 a barrel,” said Ted Bridges, principal of Omaha wealth adviser Bridges Investment Management, which owns Berkshire shares among its $1.8 billion under management.
Buffett didn’t comment for this story. But Bridges said Berkshire and Buffett are reasoning that the energy glut will one day end amid high demand, “resulting in materially higher prices, which should drive higher profits for energy companies.”
And Buffett has dived deep into the oil pool before: He continues to increase his stake in oil refiner and marketer Phillips 66 and has at various times owned billions of dollars of Exxon Mobil and ConocoPhillips stock.
Meanwhile, demand growth for the fuels of the world would only aid the fortunes of Kinder Morgan, whose 26.5 million shares are more than Berkshire owns of core holdings such as DirectTV, Moody’s and DaVita HealthCare.
Formed in 1997 from what had been a pipeline company originally started by Enron, Kinder Morgan is a kind of middleman in the energy business. It neither produces nor explores for energy commodities. Rather, it transports and warehouses them. Assets include:
» The largest natural gas network, with 69,000 miles of pipelines, moving about one-third of the natural gas consumed in the United States.
» The largest independent pipeline transporter of petroleum products, moving about 2.1 million barrels per day of gasoline, jet fuel, diesel, crude oil, natural gas liquids and more.
» The largest independent storage terminal operator, with the capacity to store 152 million barrels of refined petroleum products, chemicals, ethanol and more.
Customers include major oil companies, energy producers and shippers, local distribution companies and businesses across many industries.
“In most of our businesses we operate like a giant toll road and receive a fee for our services, generally avoiding commodity price risk,” reads Kinder Morgan’s website.
That sort of lingo might ring a bell with longtime Berkshire Hathaway aficionados.
Buffett has had a long and strong fascination with businesses he has described as having the characteristics of a toll road — ones that collect a small slice of an industry’s overall revenues, usually in return for providing some crucial service with high barriers to entry, such as moving oil and gas via pipeline.
And with all major U.S. infrastructure projects almost automatically the target of opposition from one lobby or another, analysts view it as unlikely that any additional major energy pipelines will be coming online anytime soon.
“Kinder Morgan fits Warren Buffett’s toll bridge model,” said David Kass, a business professor at the University of Maryland and owner of Class B Berkshire shares. “The concept of owning a toll is appealing because generally there is no alternative, which forces people to pay the toll. Or, if there is an alternative, it is less appealing.”
At one point in its long history, the concept at Berkshire Hathaway was tested with an actual toll bridge. In the late 1970s, Berkshire Hathaway bought a 25 percent stake in the company that owned the Ambassador Bridge, the most valuable highway crossing between the United States and Canada, situated near Detroit. It was seen as a gold mine — basically unregulated as to rates, a major public infrastructure asset in private hands, carrying 25 percent of annual trade between the two largest trading partners in the world.
According to the Berkshire Hathaway corporate biography “Of Permanent Value,” by author Andy Kilpatrick, the Detroit International Bridge Co. in 1976 earned 31 cents of net income for every dollar in sales, tops among constituents of the Dow Jones industrials. Berkshire Hathaway Vice Chairman Charlie Munger said at the time: “I can’t imagine a more secure investment than that bridge.”
Berkshire eventually lost out on its attempts to control the bridge outright. But toll bridge concepts have always been strong at the company.
Until the early 1980s, major advertising agencies Interpublic and Ogilvy & Mather were major parts of Berkshire’s stock portfolio, described by Buffett as a form of toll road, ad agencies collecting a small portion of the retail price of each automobile, box of cookies and package of ballpoint pens sold by major consumer-brands manufacturers.
And so it is with oil and gas pipelines, of which Berkshire Hathaway is already an owner, controlling Omaha-based Northern Natural Gas and Salt Lake City’s Kern River Gas Transmission through its 90 percent stake in Berkshire Hathaway Energy.
In 2014, the two Berkshire-owned pipelines combined to earn almost $400 million — right about what Berkshire just paid to take the large stake in publicly traded Kinder Morgan.
Of course, owning wholly controlled operating companies is now the main business at Berkshire Hathaway, as opposed to owning shares in other publicly traded firms. Put another way, the market value of all of Berkshire’s common stocks in 2000 was $38 billion, while operating earnings from owned subsidiaries such as See’s Candies were $3.3 billion.
Fast forward to 2014, and the value of the stock portfolio had swollen to $117 billion. But operating earnings from owned subsidiaries, which by then included BNSF Railway, were almost $20 billion.
So while the value of the stocks rose roughly threefold, the contribution of the owned businesses increased sixfold.
Others, too, have come to the Berkshire thesis on Kinder Morgan, seeing the company as a cash-generating toll bridge not too awfully concerned with what the underlying commodity is selling for.
“Hard to see much downside from here, no matter what happens in energy markets,” wrote analysts for Credit Suisse last month in a research note, upgrading their rating from “hold” to “buy,” with the expectation shares will reach $20 each. They closed Friday at $17.38 each on the New York Stock Exchange.
If Berkshire bought its Kinder Morgan shares for somewhere around $20 each, territory the stock hit in December, the Buffett-led company would book an unrealized capital gain of about $663 million if the shares return to their 2015 high of about $45.
The Omaha World-Herald is owned by Berkshire Hathaway Inc.
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