Warren Buffett's Berkshire Hathaway (BRK.A -2.00%) (BRK.B -1.83%) is putting some of its cash war chest to work. The Buffett-controlled conglomerate is spending $3.3 billion to increase its stake in Maryland's Cove Point LNG, a liquified natural gas export facility.
The investment continues Berkshire Hathaway's growing wager on fossil fuels. Here's a look at the deal and why Buffett believes carbon-based energy will remain vital to supporting the global economy.
Increasing its investment in natural gas infrastructure
Berkshire Hathaway Energy has agreed to buy a 50% interest in Cove Point LNG from utility Dominion Energy (D -1.96%) for $3.3 billion in cash. That will increase Berkshire's interest in the facility to 75%. A subsidiary of Brookfield Infrastructure Partners owns the other 25% stake in the LNG export terminal.
Berkshire initially acquired a 25% interest in the facility when it bought Dominion Energy's natural gas transmission and storage business for $9.7 billion in 2020. Meanwhile, an infrastructure fund managed by Brookfield Asset Management purchased a 25% interest in the facility for $2.1 billion in 2019.
Dominion Energy spent $4.1 billion to convert Cove Point from an import facility to an export terminal, completing the project in 2018. It can export 5.25 million tons of LNG annually, which it sells under long-term contracts that ship the fuel to 28 counties. Those contracts generate very predictable cash flow.
Betting big on fossil fuels
Buffett is no stranger to investing in fossil fuels. Berkshire Hathaway Energy operates 5,400 miles of natural gas pipelines, 756 billion cubic feet of natural gas storage capacity, natural gas gathering and processing assets, and investments in several LNG facilities, including Cove Point. It also operates utilities.
Meanwhile, Berkshire Hathaway's investment portfolio features two oil stocks among its top ten holdings. It owns 7% of the outstanding shares of oil giant Chevron (CVX 0.25%) and 25.1% of fellow oil producer Occidental Petroleum (OXY 0.27%). Buffett's Chevron stock is currently worth nearly $21 billion, while the Occidental Petroleum shares are worth almost $13.4 billion. Chevron is Berkshire's fifth largest stock holding at 5.6% of its portfolio, while Occidental is sixth at 3.6%.
Buffett's company has been adding to its Occidental Petroleum position this year. Berkshire has spent hundreds of millions of dollars to buy more shares of the oil producer as its stock price declined along with oil prices in recent months.
Berkshire's outsized investment in fossil fuels suggests that Buffett firmly believes the world will continue relying on oil and gas for quite some time. He's not alone in this view. Long-term forecasts from the International Energy Agency, U.S. Energy Information Administration, and OPEC forecast flat to as much as 30% demand growth for fossil fuels through 2050. While most expect coal demand to decline and oil usage to eventually peak, demand for cleaner-burning natural gas should continue rising. That should support the growing need for LNG export capacity.
According to LNG leader Shell, global LNG demand will rise from 397 million tons annually in 2022 to an estimated 700 million tons by 2040. While several developers are working to bring more LNG capacity online, a large shortfall between projected supplies and demand is poised to develop early next decade. That could push LNG prices higher, potentially positioning Berkshire to capture higher prices as legacy contracts supporting Cove Point roll off. Even without higher pricing, Cove Point should produce lots of steady cash for Berkshire in the coming years.
Aiming to cash in on the continued use of fossil fuels
Buffett's company continues to increase its wager on fossil fuels, driven by the belief that the world will rely on oil and gas for years to come. That growing bet positions Berkshire to make a lot of money in the future as its energy subsidiary transports and exports gas while its oil stock investments produce dividend income and share price appreciation. That would give Berkshire even more money to allocate to create value for shareholders.