Buffett’s First Purchase Since the March Crash

After sitting back and doing nothing through the March stock market crash, Warren Buffett has finally bought something…

And it’s BIG!

Buffett watchers have been dying to see which beaten-down sector he would swoop into to lock down an epic bargain.

In 2008, Buffett made billions for his Berkshire Hathaway (NYSE: BRK-A) shareholders.

At the depths of the financial crisis, he made brilliant investments in companies like Bank of America (NYSE: BAC), Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE) at incredible terms for Berkshire.

So where did Buffett unload some of Berkshire’s $137 billion war chest this time?

Pipelines – more specifically, natural gas pipelines.

In a recent announcement, Berkshire agreed to spend about $10 billion to acquire Dominion Energy’s natural gas transmission and storage business.

(Berkshire Hathaway Energy – the energy segment of Berkshire Hathaway – will write a check for $4 billion and also take over $5.7 billion of debt that is tied to the pipelines. That is how we get to the $10 billion price tag.)

Even for Buffett, that’s a significant chunk of change.

For $10 billion, Buffett will get 7,700 miles of natural gas pipelines and 900 billion cubic feet of Dominion-operated natural gas storage.

The transaction will turn Berkshire Hathaway Energy into one of the country’s largest natural gas transportation operators.

Once the deal closes, Berkshire will carry 18% of all the interstate natural gas transmission volumes in the country, up from the 8% that the company currently carries.

If you are using natural gas to power your home, there is now an 18% chance that it got there through one of Warren Buffett’s pipelines.

I bet you always thought you’d be in business with the Oracle of Omaha!

That Is What He Bought, but Why Did He Buy It?

Like with all of Buffett’s deals, there’s all kinds of speculation as to why he made this purchase.

The most exciting explanation that I’ve seen is that in buying these natural gas assets, Buffett is making a big bet on the electric car.

The argument is that the coming electrification of American vehicles will juice the demand for natural gas that goes to electric power plants.

While I think there is some truth to that, I think the rationale for this purchase is much simpler.

I believe he made this particular deal for three reasons:

1. He is already in this business and understands it very well.
2. With natural gas prices at a 25-year low, the price was attractive.
3. The cash flow that these assets produce is recession-proof.

By acquiring these assets, Buffett is taking $4 billion of cash that was sitting in the bank and earning nothing and putting it into these natural gas assets that generate steady cash flows.

According to Dominion Energy’s most recent annual report, these assets generate roughly $900 million of earnings per year.

What Does This Mean for You?

It is important to note that the assets that Buffett acquired involve transporting and storing natural gas.

Buffett is not getting into the production or extraction of natural gas, which would involve taking on commodity price risk.

There’s a big difference.

What Buffett bought generates steady, predictable cash flow.

The assets purchased create that cash flow by charging a fee for allowing companies to transport their natural gas. It’s not directly tied to the price of the underlying commodity.

The natural gas being transported is used to supply electricity, the demand for which is very predictable. Consumers need power for heating and cooling no matter what the economy is doing.

For Buffett and Berkshire, the cash flow that these assets generate is virtually recession-proof. The contracts with customers are also long term.

By building out this energy business, Buffett is ensuring that Berkshire will have a steady stream of cash flow through all economic conditions.

As investors, we should be emulating what Buffett is doing.

He isn’t swinging for a home run here. He’s taking a swing at a pitch that he knows he can hit for a single or double.

Like Buffett, we should be building steady streams of income that provide cash flow no matter what is happening in the world.

Our objective is to get rich slowly, not overnight.

Buffett’s acquisition of these assets shows that not every great investment has to pay off big quickly.

Great investments are also those that pay off steadily over time.

Good investing,

Jody

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