Is This the Next Elephant in Warren Buffett's Crosshairs?

 

Is Warren Buffett secretly looking at Sempra Energy? 

While Berkshire Hathaway CEO Warren Buffett doesn't like to give away his next big buy, he does leave hints. We know, for example, that Buffett wants to double Berkshire Hathaway's $15 billion bet on renewable energy. Meanwhile, we also know that Buffett wants to bag another multibillion-dollar elephant, and the energy sector is among his favorite hunting grounds. So if we put two and two together, does it add up that Sempra Energy (NYSE: SRE  ) will be Warren Buffett's next purchase?

What Warren Buffett wants
In Buffett's last shareholder letter, he was fairly upfront about Berkshire Hathaway's acquisition plans when it came to its MidAmerican Energy subsidiary. Buffett stated that last year's $5.6 billion buy of NV Energy "will not be MidAmerican's last major acquisition." Further, Buffett frequently talks about wanting to find an "elephant"-sized deal to put Berkshire Hathaway's cash to work.

In addition, we know that Buffett is ready to double Berkshire Hathaway's $15 billion bet on renewables. However, while Buffett has plenty of organic growth opportunities in the space, he could use his next deal to expand that opportunity set even further. For example, one of the reasons behind the NV Energy purchase was to provide Berkshire Hathaway with a platform upon which to develop more renewable-energy projects.

Why Sempra Energy might fit the bill
At a market cap of more than $25 billion, Sempra Energy certainly is an elephant if there ever was one. Its market cap alone is five times what Berkshire Hathaway paid for NV Energy last year, which was MidAmerican Energy's largest deal ever. Meanwhile, with $12.9 billion in debt Sempra Energy's total enterprise value is already more than half that of Berkshire Hathaway's entire MidAmerican Energy subsidiary, which has about $70 billion in assets.

That being said, what's attractive about Sempra Energy isn't so much its elephant size but its gazelle-like speed with which its growing earnings. Its current plan should generate 9%-11% compound annual earnings growth through the end of the decade. That's about double what the average utility will do over that same timeframe. However, despite the speedy growth profile, Sempra Energy's risk profile is similar to its utility peers as it's focused on assets that generate stable, predictable earnings and cash flow. It only invests in projects that are supported by long-term, fixed-price contracts with credit-worthy counterparties.

The other reason Sempra Energy is attractive is because it's focusing a good portion of that growth on renewables. Currently the company has 1,082 megawatts of wind generation along with 300 megawatts of solar capacity in operation at its U.S. Gas & Power subsidiary, as the following map shows.

Source: Sempra Energy investor presentation. (Link opens a PDF.) 

However, as also noted on that map is that Sempra Energy has several renewable-energy projects in development. Overall, the current five-year plan will see the company add another 644 megawatts of renewable energy in the U.S., though Sempra Energy does have additional renewable opportunities in the pipeline that it's pursuing, which would be additive to its current plan. Further, Sempra Energy has a Mexican subsidiary, which is working on a 156 megawatt wind project, could soon expand it another 300 megawatts. The company has plenty of experience in renewables as well as ample growth opportunities in the space. 

Investor takeaway
There's a lot more to Sempra Energy than just its renewable growth, as the company's LNG export facility and international operations will fuel substantial future growth as well. Combined, it has turned Sempra Energy into one of the fastest growing utilities in the space. The question is whether it's growing too fast for Buffett to catch, given his desire to hunt in the slower pace value side of the market. Because of that, the odds are that Sempra Energy isn't in his sights just yet, as the price might be just a bit too steep even for Warren Buffett. However, if the value could ever line up to Buffett's liking, this would be quite the elephant for him to bag. 

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  • Report this Comment On July 19, 2014, at 2:10 PM, AdamGalas wrote:

    Though I'm a 100% loyal to high quality, high yielding MLPs and stocks, I'll make an exception for BRK and MKL. Simply put, they are the two best non-yielding investments in America and by using high dividends to pay for cheap margin to leverage these two at a safe 1.5:1 long-term market out performance is assured.

  • Report this Comment On July 19, 2014, at 3:24 PM, TMFmd19 wrote:

    NOTE: $70B in assets is Berkshire's entire energy subsidiary, not just MidAmerican.

    Matt

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