Warren Buffett Loves Energy Investments. Should You?

Warren Buffett made headlines last month when he announced that his company, Berkshire Hathaway (NYSE: BRK-A  ) , was buying Heinz. Ketchup is delicious, and a company that makes it is pretty easy for the average American to understand; we see ketchup, we get ketchup.

Some of Buffett's other investments can be a little bit more complicated -- particularly when it comes to the energy industry -- but that doesn't mean they should be off the table. In fact, Buffett has shown tremendous foresight in his energy-related deals over the past few years, and investors hip to his thinking stand to reap profits of their own.

Buffett and solar
At the beginning of this year, Berkshire Hathaway subsidiary MidAmerican Energy announced that it was buying a 579 megawatt solar plant from SunPower (NASDAQ: SPWR  ) for about $2.5 billion. The new plant will make a nice addition to MidAmerican's two other solar plants that First Solar (NASDAQ: FSLR  ) is building for the company in California and Arizona. These purchases will add to the subsidiary's growing portfolio of renewables, which also includes wind, geothermal, and hydro.

The future of renewable energy looks bright, and solar is one of the many ways investors can take advantage of that trend. After all, the U.S. is slated to generate 10 GW of power from solar energy by the end of this year, so there must be something to that. But Buffett isn't limiting his investments to solar power; he is investing in all facets of the American energy story, including oil and gas.

Buffett and oil
In 2009, Berkshire Hathaway purchased Burlington Northern Santa Fe. Buffett said he was making an "all-in wager on the economic future of the United States" at the time. That bet has paid off in spades, as only a few years later oil production in the Midwest has kept unemployment down and revitalized railroads. How? Production of the black gold has grown beyond the capacity of regional pipelines, forcing producers to use trains to get it to market -- Warren Buffett's trains, to be precise.

The Energy Information Administration has helped put this trend in context, pointing out that oil (and petroleum products) is the fastest-growing commodity-by-rail shipping movement right now:

Source: EIA. 

And of course, Buffett's railroad just happens to be the largest holder and operator of rail lines in North Dakota, the origin of all this oil. It's estimated that 52% of oil produced in the Bakken Shale is transported out of the play via rail right now. BNSF is doing its part and expects to cart out 700,000 barrels each day by the end of this year.

Buffett and gas
But Buffett's energy connection doesn't end there. BNSF recently announced that the railroad will begin experimenting with natural gas as a transportation fuel this year. Instead of running on costly, polluting diesel, a select number of BNSF locomotives will run on cheaper, cleaner natural gas. BNSF is one of the country's largest consumers of diesel, and should a complete transition to natural gas be made, it would save more than few pennies.

In the span of three years, Buffett has made three very different energy investments, illustrating the wide range of opportunities available to today's investors. The options can be overwhelming, but that doesn't mean investors who don't know all there is to know about energy should sit on the sidelines.

Are energy investments right for you?
There are many different types of energy investments out there, with many more companies making up each different sector. Before you select a specific equity to buy into, it is important to understand the underlying business, so you can properly evaluate a company's strengths and weaknesses, and its long-term potential. This can be a daunting challenge if you lack a background in any particular industry. Fortunately for investors, there are ample sources available for us to self-educate. For the sake of continuity, I'll continue to use natural gas and solar power as our examples.

Getting to know natural gas
Most people are familiar with natural gas as a way to heat their homes, light up their stovetops, or fire up the grill. "Fracking" has become a buzzword, and most Americans now know that it's the reason behind our tremendous volumes of cheap natural gas. To find the best investment in this space, it's crucial that investors know exactly what natural gas is and how it is produced, but it's also important to know the larger macro story and how the price of gas is affected by drilling and, potentially, exports.

Don't be deterred. There are basic primers available at Fool.com to get you started. For example, "Natural Gas 101" explains what natural gas is, what the units of measure mean, and who the top producers are. "Natural Gas 201" goes on to explain where the gas comes from and how it is produced, while "Natural Gas 301" tackles the important details presented in quarterly and annual reports. And finally, fellow Fool Dan Dzombak has put together a history of the natural gas macro story, featuring 15 easy-to-read charts.

Solar time
The situation is much the same for solar power. Not all solar investments are created equal -- in fact, some are downright terrible -- but before we start picking and choosing our favorites, we should check out Jeremy Bowman's primer on how the technology works in the first place.

Once we have that foundation in place, we can check out what the Fool's resident solar expert, Travis Hoium, has to say about the best and worst solar investments. Once you have a handle on what you want to see in an investment, you can track your companies with weekly updates on your way to making an investment decision.

Foolish takeaway
We all know we can't make the exact investments that Warren Buffett makes, but we can certainly pay attention to the types of investments he targets and, at the very least, consider them for ourselves. Energy is certainly one of the more worthwhile options, as it isn't going out of fashion anytime soon.

The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.


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  • Report this Comment On March 10, 2013, at 4:33 PM, banmate7 wrote:

    Yes! Yes! Yes!

    At the prompting of a internet chat board associate, I had to contextually temper my enthusiasm for an emergent American energy boom. I now understand issues related to global peak oil.

    Fine, going forward, we might be at peak oil. Moreover, North American oil "discoveries" won't necessarily increase global aggregate production. However, it still will increase runway significantly and be a catalyst for domestic manufacturing. Perhaps this makes energy investing more compelling?

    I think so. I put a significant investment in NOV. I already am invested in energy supply chain companies: TRN, CNI, even GE. I am speculating in riskier alternate energy companies like GTAT, a solar play.

    Energy is life & power, no exaggeration. Again, in light of convincing peak oil data & analysis, companies that help in the energy equation are worthy. We need technologies to maximize oil location, extraction, distribution, and usage...as well as those that leverage alternate fuels, like coal, gas, nuclear, & solar.

    Best of luck all.

  • Report this Comment On March 10, 2013, at 5:11 PM, carpmarlboro wrote:

    Seems to make sense why Obama is so hesitant to build that new pipline. His buddy owns the railroad! It also makes sense for Buffet to invest with all the hundreds of millions Obama is throwing out there for green energy.

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