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This Energy Play Has Warren Buffett Playing Catch-Up

Companies / Oil Companies May 15, 2014 - 11:52 AM GMT

By: Money_Morning

Companies

William Patalon III writes: It's absolute gospel in the world of investing to study and understand the moves that Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) are making - and then to follow them for profit.

And with good reason: Buffett's track record speaks for itself - and he augments his capital-markets genius with the homespun, down-to-earth personality that's cemented his spot as a hero to the masses.


One of Buffett's newest forays has taken his Berkshire investment vehicle into the energy sector.

But he wasn't the first to get there. We were. And it's paying off in a big way...

"The Biggest Potential Catalysts of All..."

In a move that acknowledges the "brand power" that Berkshire has amassed in the investing arena, Buffett's outfit this week changed the name of its energy arm from MidAmerican Energy to Berkshire Hathaway Energy.

The bottom line here is that Buffett & Co. has recognized the big profit opportunities available in the "midstream" (delivery) portion of the oil-and-gas market. So you can bet that he and Berkshire Hathaway Energy will be making additional moves to snap up properties in liquefied natural gas (LNG), pipelines, and electricity production.

Once again, Warren Buffett is demonstrating that he's the master investor we all believe him to be. These are all newly lucrative profit opportunities that will only grow in value in the years to come. And there's little doubt that he'll execute to perfection.

Since joining Money Map Press back in 2010, global energy expert Dr. Kent Moors has been talking about the potential for the midstream market, has been predicting the paradigm-shifting potential for LNG, and has been saying that America would be regaining "Energy Independence" for the first time since the Standard Oil days of John D. Rockefeller.

And thanks to the investment recommendations he's been sharing with Private Briefing, you folks have had the chance to cash in alongside his own subscribers.

Even so, as I've told you all many times since we launched this service nearly three years ago, once we've established a position in a stock or have identified a sector as having big-time profit potential, we're only too happy to have Wall Street heavyweights draw the same conclusions. The added attention they bring is a catalyst for higher profits for us since the investment banks, money management firms, and all their customers can deliver the kind of sustained liquidity that will drive up the value of our existing holdings.

And, as investing icons, Buffett and Berkshire can serve as the biggest potential catalysts of all.

So I thought we should take a look at what Team Warren is up to, and have Kent tell us what it means.

Berkshire Hathaway, by Any Other Name

A year ago this month, Berkshire Hathaway's MidAmerican Energy utility said it was spending $5.6 billion to buy NV Energy Inc., a Nevada electric-and-natural gas firm that serves customers through Nevada Power Co. and Sierra Pacific Power Co.

Buffett's folks saw a big opportunity to jump-start NV Energy's growth. MidAmerican has been an enthusiastic investor in renewable energy products, and experts said that experience would help NV Energy create such products in its home state - a sound strategy given that Nevada has a hefty presence in solar, geothermal, and wind resources.

This deal also plays into a broader industry trend.

Utilities are being forced to consolidate because of rising costs, aging infrastructure, and tough regulations aimed at driving cleaner energy. Utilities also rely heavily on debt to function. And with its huge financial base, the thinking was that Berkshire would have the muscle to lower borrowing costs even as it engineered the kinds of deals needed to add "scale" and new growth-generating services.

Since making the NV Energy deal, Berkshire has pulled off a couple of smaller acquisitions. Then, a week ago, it announced the subsidiary name change to Berkshire Hathaway Energy.

The changed name "more accurately reflects our growing, diversified mix of businesses and the customers they serve," says Greg Abel, the energy-unit CEO who has earned high marks for his stewardship. "Our new name reflects the benefits we gain from Berkshire Hathaway's ownership, particularly our ability to reinvest in our businesses and take a long-term view of our customers' needs, which have helped us become a leader in the global energy industry."

Berkshire Hathaway Energy has amassed a nice set of properties, including:

  • MidAmerican Energy Co.
  • MidAmerican Renewables
  • PacifiCorp (consisting of PacifiCorp Energy, Pacific Power and Rocky Mountain Power)
  • Northern Powergrid (formerly CE Electric UK)
  • Integrated Utility Services UK
  • CalEnergy Generation
  • Kern River Gas Transmission Co.
  • Kern River Pipeline
  • Northern Natural Gas Co. (Omaha)
  • HomeServices of America
  • BYD Co. (a 10% stake)
  • NV Energy
  • Metalogic Inspections Services
  • Intelligent Energy Solutions

Berkshire Hathaway also owns Burlington Northern Santa Fe Corp., the parent of BNSF Railway (formerly the Burlington Northern and Santa Fe Railway). The railroad is a major transporter of crude oil (about 10% of oil produced in the lower 48 states) and is also a key logistics operator.

As I dug down into Berkshire's energy portfolio, I realized I needed a true expert's view.

And that's when I telephoned Kent...

Our Expert Weighs In

Kent, who edits our Energy Advantage advisory service, is an energy-consultant superstar. He serves as an advisor to the highest levels of the U.S., Russian, Kazakh, Bahamian, Iraqi, and Kurdish governments; to the governors of several U.S. states; and to the premiers of two Canadian provinces. He's served as a consultant to private companies, financial institutions, and law firms in 25 countries and has appeared more than 1,400 times as a featured radio-and-television commentator.

And he's made some great calls for us. In fact, his recommendation of Vestas Wind Systems A/S (OTC ADR: VWDRY), a Denmark-based leader in wind-power applications, is up 64.97% since he gave it to us in the late-December special report, Our Experts' Best Ideas for 2014.

In short, Kent is one of the most-knowledgeable and best-connected energy-sector insiders in the world.

So I asked him to look at the moves that Team Buffett is making and offer his analysis.

"Bill, Warren Buffett's moves into energy are focusing on something I have trumpeted for some time," Kent said. "It is the delivery systems - midstream plays in oil and gas, power transmission lines and networks in electricity, moving crude by rail - that have attracted his attention and resulted in acquisitions. There is much expansion needed here and movements for higher profits are already following."

And given the fact that Berkshire isn't done, yet, what kinds of acquisitions will the company make next?

"I look for Berkshire Hathaway to parlay this interest in deliveries into the next big area -liquefied natural gas (LNG) exports," Kent said. "This will be taking off from the U.S. market in about a year. Expect BH to acquire positions in feeder pipelines, gathering-and-processing systems, and terminals for moving U.S. liquefied gas to both Europe and Asia."

Because we know that, we can make moves now. So I asked Kent where investors should look.

"Bill, the best plays remain the related Cheniere Energy (NYSE: LNG) and Cheniere Energy Partners (NYSE: CQP)," he said. "Cheniere Energy has huge export contracts in hand, while Cheniere Energy Partners owns the company's Sabine Pass terminal on the Gulf of Mexico. Both are up strongly in my services."

And in Private Briefing, as well. We're up 88% since recommending LNG at $29.50 a share in the July 10 report "What Our Experts Predict For the Year's Second Half." And we've posted a smaller, 6.4% profit since telling you about CQP at $30.54 a share in the Nov. 6 report "The Best Opportunity of The Decade." It pays a nice 5.2% dividend.

A True "Revolution"

Although the companies share the Cheniere first name, they are wholly separate companies - a pair of fraternal (not identical) twins, or the yin to the other's yang.

There's actually an easy way to differentiate the two.

Cheniere Energy (LNG), you see, owns the gas.

And Cheniere Energy Partners (CQP) owns the shipment facilities - the pipelines and LNG terminal facilities.

But here's the key point: Kent views both of these as "core holdings" - foundational plays for the energy-focused portion of your portfolio. They are two of the best ways to take advantage of a shift in the U.S. energy sector that Kent likes to refer to as the "LNG Revolution."

"Bill, these are both 'base-builder' holdings," Kent told me. "And they are actually two parts of the same, single initiative - the 'LNG Revolution' that we've talked about before. The bottom line here, Bill, is that the liquefied natural gas (LNG) revolution is set to hand us one of the best investment opportunities of the decade - and U.S. investors just can't afford to miss out. And you're right about [the comment you made that this represents] a stunning reversal from where we've been. I mean, just seven years ago, all the so-called 'experts' agreed that the U.S. would be using LNG imports to meet 15% of this country's gas needs by 2020. But now the U.S. is poised to become a hefty LNG exporter. "

In other words, the "revolution" represents a total potential reversal of the United States' global energy position.

America's New Energy Source

As Kent said, just seven years ago, the so-called "experts" agreed that the United States would need to use imports to meet 15% of the country's gas needs by 2020.

The bleak story was the same one we'd been hearing for years: Americans are wasteful... the country hasn't made the needed investments in renewable energy technology... and the United States remains at the mercy of OPEC.

But that was before improved methods of "hydro-fracking" - which gave producers access to vast new deposits of oil and natural gas - made it economically practical.

Now the United States is projected to become a hefty LNG exporter.

This will elevate the United States' importance on the global stage, Kent says.

"For a long time now, liquefied natural gas has been a rising factor in the energy sector's global balance of power - becoming, as it has, a main source of fuel in places like Japan, South Korea, Taiwan, and Mainland China," Kent told me.

I've seen the evidence myself.

Back in May 2010, for instance - just days after Real Asset Returns Editor Peter Krauth predicted a global uptick in LNG demand because of the Fukushima nuclear power plant disaster in Japan - I heard Radio Japan International report that LNG imports in that country would increase by a full 50% to help offset the massive energy shortage the country faced as a result of the tragedy. The Fukushima catastrophe took that power plant out of commission - and turned the country's population against nuclear power - meaning Japan suddenly had a massive hole in its energy supply.

And stepped-up LNG imports (a lot of which would come from Australia) were an immediately available partial solution for Japan.

Now, thanks to the fracking boom, the United States is poised to become a big global LNG supplier.

According to a recent report by CNBC, U.S. natural gas production reached the "eye-popping" total of 25 trillion cubic feet in 2012. And new Energy Information Administration (EIA) statistics show that the United States this year leapfrogged both Russia and Saudi Arabia on the list of top natural gas producers.

To become a big exporter, however, the United States is going to have to embark on a crash building program to create the "infrastructure" needed to export LNG.

On a global basis, the LNG boom will spark roughly $346 billion in energy-related infrastructure investments by 2025, researcher IHS says.

And that will create profit opportunities that are massive in scale, Alex Choinski, a partner and project finance lawyer at the law firm of McDermott Will & Emery, told CNBC. "The advantage is the U.S. has a lot of infrastructure and a unique arbitrage opportunity in overseas markets thanks to the [fracking] boom. The economics can work if you can get the timing and deal structure right."

Exporting LNG requires Department of Energy (DOE) approval. And throughout the United States, work is underway on about 10 projects that will be crucial in transforming the country into an energy-exporting powerhouse.

One of those is Cheniere's Sabine Pass facility in Louisiana, Kent says.

That facility received approval in September 2012 - two years after Cheniere Energy first petitioned federal energy regulators for a license to export.

Situated on the Gulf coast, Sabine Pass will be able to export 2.2 billion cubic feet of natural gas per day - which the American Petroleum Institute says is worth more than $26 million per day.

This is a big, big project: It will cost $5.6 billion to complete and will create 3,000 jobs when finished, CNBC reports.

That size also conveys the potential that Sabine Pass holds - which is why Kent likes the yin-and-yang duo of the Cheniere companies..

"Both of these firms relate to the Sabine Pass facility on the Gulf coast and the ramp-up of significant LNG exports from the U.S. to most of the rest of the world," Kent explained. "Cheniere Energy Partners is the partnership that owns the Sabine Pass terminal. Cheniere Energy (LNG), on the other hand, actually runs the liquefied gas exporting business, along with two other smaller terminals and a marketing wing for the distribution of LNG. That gives Cheniere Energy Partners an asset base. As a limited partnership, Cheniere Energy Partners also provides a dividend (currently 5.63% annualized). That is another advantage to owning the stock. So far, what Cheniere Energy has in hand is five huge multibillion-dollar, 20-year export contracts with some of the top players in the LNG market. There's a lot to like here... for a long time to come."

As an investor, it's great to see what investment moves Warren Buffett is making. It's even better to know where he's going next... especially if you're already there.

Source : http://moneymorning.com/2014/05/15/this-energy-play-has-warren-buffett-playing-catch-up/

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