Warren Buffett doesn't take investment decisions lightly. If he is buying something, then the company probably has a very optimistic long term outlook that may be overlooked. So far this year, Mr. Buffett's Berkshire Hathaway (BRK.B -0.01%) has made 2 major pickups in the energy space: National Oilwell Varco (NOV 1.45%), Suncor (SU 0.18%). Also, Berkshire subsidiary Mid-American Energy will be closing an acquisition for NV Energy (NYSE: NVE) this quarter. So what makes these companies so special that they get the Warren Buffett stamp of approval? Let's take a look at these three companies and see what gives them that secret sauce.
NV Energy, more than meets the eye
Unless you pay a utility bill in Nevada, or you are a Warren Buffet superfan that follows every move, you may not have heard much about NV energy. Then again, the regulated utility for Nevada -- the state that ranks 40th in terms of power consumed per capita -- is not exactly a company that is going to entice lots of investor excitement. But, as a regulated utility, it is a pretty stable business that generates relatively predictable cash flows. Can you think of a more boring investment? Probably not.
Then again, there are loads of regulated utilities out there. So why was NV Energy in Warren Buffett's sights? Aside from shifting the Berkshire portfolio toward more natural gas generation and less coal, NV Energy is quite possibly the best position to serve one of America's largest electricity markets: California. California's massive hunger for imported alternative energy, coupled with over 6,400 megawatts of alternative energy projects coming online in Nevada will make NV Energy's transmission system between California and Nevada some of the most highly prized power lines out there.
Since NV Energy is being completely bought out by Berkshire, and the price for the acquisition is pretty much priced into the stock, it's a little futile to buy shares now.
National Oilwell Varco, flying high, but under the radar
National Oilwell Varco is extremely unique in the energy space. The company has evolved into a $34 billion giant of the oil and gas industry without actually touching a drop of oil itself. Rather, the entire company is built around the premise of being a one stop shop for any piece of equipment or service an exploration & production company needs from the initial testing of the well all the way to squeezing the very last bit of hydrocarbons out of a reservoir. This provides National Oilwell Varco two distinct advantages over many other parts of the oil and gas space. 1) The company is much less exposed to the swing of oil prices, and 2) Having parts and equipment for the entire life cycle of a well provides plenty of opportunities for up selling and developing relationships with customers.
So far this, year, Berkshire Hathaway has increased its shares in National Oilwell Varco by 67%, which might suggest that Mr. Buffett still sees some upside in this company. Based on the company's recent earnings release, there is a lot of evidence to support that. The company ended this past quarter with a backlog of orders for higher end products like drillships and jack-up rigs totaling $15.15 billion. As the offshore market continues to explode, equipment providers like National Oilwell Varco could have a very bright future ahead of them.
Suncor, unearthing value in oil sands
Sometimes, its hard to fathom the sheer size of the reserves in Canada's oil sands formations. Between 1998 and 1999, Canada's proved reserves jumped 266% to become the worlds 3rd largest holder of proven oil reserves. In this business, there are few companies out there that have as much potential as Suncor. The company has almost 7 billion barrels of proven & probable reserves with another potential 23.5 billion in contingent resources the company believes are a best estimate of resources not yet discovered on its properties that could be extracted.
The one thing that makes oil sands more attractive is their ability to generate sustained cash flows for a very long time. Suncor's new Fort Hills development is estimated to generate strong cash flows for over 50 years, which is considerably longer than the average life of an offshore or tight oil well.
Source: Suncor Investor Presentation
The biggest weakness for Suncor and the rest of Canadian oil sands producers, though, is a lack of refining and takeaway capacity. This is why oil from this region sells at a $42 discount to American benchmark prices. This may actually be the biggest reason that Warren Buffett decided to pick up shares of the company. First, Suncor's new CEO Steve Williams has shifted the company's strategy to focus on fixing the inefficiencies in the company's current process versus all out growth. Also, major pipeline projects out of the region are getting pushed back by political problems. So Berkshire Hathway's Burlington Northern Santa Fe rail could provide a key cog in getting oil sands to American refiners. A symbiotic relationship between Burlington Northern and Suncor could go a long way in increasing the company's takeaway capacity and possibly increase its price realizations on oil sands.
What a Fool Believes
One of the most astounding things about Warren Buffett's ability to pick great companies is that he is able to do it across several industries. Over the very long term, all three off these companies bring something to the table that have great potential to add value to the Berkshire Hathaway portfolio, and it wouldn't be surprising if Mr. Buffett decides to pick up more shares of National Oilwell Varco and Suncor in the future.
