Is This Warren Buffett's Next Big Buy?

In his last shareholder letter, Warren Buffett stated that Berkshire Hathaway was planning on future large-scale energy acquisitions to add to its growing energy empire. This article highlights a company right up Buffett's alley that may be in the crosshairs of his acquisition elephant gun.

Aug 23, 2014 at 4:46PM

Warren Buffett's Berkshire Hathaway (NYSE:BRK-B) is sitting on a record amount of cash, causing Wall Street to speculate as to what the Oracle of Omaha plans to do with it all. 

BRK.B Cash and Equivalents (Quarterly) Chart

BRK.B Cash and Equivalents (Quarterly) data by YCharts.

With $55 billion in cash and Buffett having stated in the past that "we will always maintain supreme financial strength, operating with at least $20 billion of cash equivalents," that leaves $35 billion for potential acquisitions. As my Foolish colleague Patrick Morris recently highlighted, Berkshire is betting big on energy. Having bought MidAmerican Energy Holdings in 1999 in a $9 billion deal, Berkshire followed up with several other major energy purchases. These include the $9.4 billion acquisition (cash plus debt) of utility PacifiCorp in 2006 and the $10.1 billion purchase of NV Energy in 2013.

In his 2013 shareholder letter, Buffett stated, "NV Energy will not be MidAmerican's last major acquisition," and the Oracle proved true to his word with Berkshire acquiring AltaLink, a Canadian power transmission company that serves 3 million customers.

Berkshire Hathaway Energy
On April 30, MidAmerican Energy was rechristened Berkshire Hathaway Energy.

The subsidiary has over $70 billion in assets, serves 8.4 million total international customers, and in 2014 is expected to generate 10% of Berkshire's pre-tax profits from $12.6 billion in revenues.

On May 3, Buffett announced his intentions to continue adding to Berkshire Hathaway Energy with an acquisition up to $50 billion. An acquisition of that size would require both cash and taking on debt, but at today's low interest rates, Buffett indicated he'd be comfortable doing so.

According to noted Buffett scholar Robert Miles, Berkshire is interested in capital-intensive companies with consistent cash flows, strong moats, and returns on equity above 10%. This is because Berkshire Hathaway generates $2 billion per month in cash flows and has a lower cost of capital to invest in projects that other companies might not want to take a risk on.

Buffett's next big purchase -- pipelines? 
Berkshire Hathaway Energy already operates 16,400 miles of natural gas pipelines through its subsidiary Northern Natural Gas. Pipelines would be a perfect fit for Berkshire for three main reasons.

First, they generate gobs of cash through long-term contracts that are typically inflation-hedged. Second, they are expensive to build and require lots of capital, which Berkshire has in spades thanks to its insurance companies. In fact, Berkshire Energy can borrow money from Berkshire's insurance subsidiaries at rates lower than U.S. treasuries. This creates a durable competitive advantage that is the hallmark of Buffett investments.

Finally, Buffett likes investing along mega-trends, as seen by his $15 billion investment into renewable energy and, as he claims, "another $15 billion ready to go, as far as I'm concerned."

According to analyst firm ICF International, $641 billion in energy infrastructure investments will be needed by 2035 to support America's shale oil and gas boom. 

 North Dakotatexas Oil Production

Source: EIA

And according to Scott Sheffield, CEO of Pioneer Natural Resources, U.S. oil production could nearly double to 14 million barrels per day within a few years.

Marcellus Production Boom

Source: EIA July Drilling Productivity Report.

Similarly, U.S. gas production is soaring, with the Marcellus shale increasing production by 15-fold in just seven years, and ICF International estimating that this production will soar an additional 127% by 2035.

Who Buffett may buy next
Analyst firm Robert W. Baird & Co believe Berkshire may be eyeing pipeline giant Plains All American Pipeline (NYSE:PAA) and its general partner Plains GP Holdings (NYSE:PAGP)

Why would Buffett find Plains All American appealing? Well, for one thing, Plains All American owns a fleet of 7,400 oil and natural gas liquids (NGLs) rail cars. This provides potential synergy opportunities with other Berkshire companies such as Union Tank Car and Burlington Northern Santa Fe railway. This is especially true given that oil tanker car volumes are expected to increase 20-fold from 2010 to 2015 or 2016, according to Toby Kolstad, president of the consulting firm Rail Theory. 

Paa Tanker Car Presence
Source: Plains All American Pipelines 2014 Analyst Meeting Presentation

Another thing Buffett looks for is solid management that can stay on after an acquisition and continue growing the company. Plains All American has one of the best management teams in the industry, with a successful history of over 70 acquisitions since 2001 and a good track record of organic investment, which has grown to over $1.5 billion annually. 

Why Buffett should buy Plains All American
There are two main reasons Berkshire would do well buying Plains All American Pipelines and its general partner. First, the size of the deal is large, and it would move the needle for Berkshire Hathaway, whose $205 billion in projected 2015 revenue is getting harder to grow. Analysts expect Plains All American to deliver $48.5 billion in 2015 revenues, which would represent 23.7% sales growth for Berkshire. 

The second reason is valuation. The enterprise value, which represents the cost to acquire a company by accounting for cash and debt, for Plains All American and its general partner is just $42.75 billion. Thus the price tag fits within Buffett's $50 billion maximum mentioned on May 3 and would represent a price-to-sales ratio of close to one. This is in line with ExxonMobil (P/S of 1.06), which Berkshire Hathaway owns 0.92% of in its stock portfolio.

Buffett: This new technology is a "real threat"
At the recent Berkshire Hathaway annual meeting, Warren Buffett admitted this emerging technology is threatening his biggest cash-cow. While Buffett shakes in his billionaire-boots, only a few investors are embracing this new market which experts say will be worth over $2 trillion. Find out how you can cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.

Adam Galas has no position in any stocks mentioned. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers