America is in the middle of a energy boom, and two of the country's richest men are betting it will continue. Here's why.
The famous faces
Warren Buffett, with a net worth north of $65 billion, is the chairman and CEO of Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) the conglomerate composed of countless operating businesses, including energy businesses.
T. Boone Pickens is also an avid investor and billionaire himself, who made his money through activist and takeover investing in the energy industry. Yet he is perhaps better known for his noble initiative entitled the "Pickens Plan," which he began with $100 million of his own money as a "grassroots campaign aimed at reducing America's crippling dependence on imported OPEC oil."
The surprising similarities
While many people rightly think of Buffett as an investor in companies, fewer realize he, like Pickens, has billions dollars tied to the industry energy -- and specifically natural gas -- through Berkshire Hathaway.
Sure he has a $4 billion position in ExxonMobil (NYSE: XOM) that he began amassing in the second half of last year. But MidAmerican -- the utilities and energy business in which Berkshire Hathaway owns nearly 90% of -- delivered almost $13 billion in revenue last year. In fact, nearly $1 billion worth of that revenue was from its natural gas pipelines.
In total, the utilities and energy business had $1.5 billion in net income in 2013 and represented almost 8% of the total $19.5 billion at Berkshire Hathaway. In other words, Warren Buffett has a lot riding on the energy boom.
Just a few months ago, Berkshire Hathaway acquired NV Energy for $5.6 billion, which provides electric and natural gas power to almost 1.5 million customers in Nevada. This means the sizable business positioning in the energy landscape by Berkshire Hathaway will only continue to grow in the coming years.
And this discussion even excludes the railroad arm of Berkshire Hathaway, Burlington Northern Santa Fe, which itself had $5 billion in revenue transporting coal across the U.S.
All of this is to say, while many may think of Buffett and T. Boone have different interests, each are invariably tied to America's energy industry.
The recent remarks
Recently, a few employees of The Motley Fool ate lunch with T. Boone Pickens to conduct a fascinating interview, covering a wide range of topics, speaking to the seemingly endless benefits of the energy industry in America. Yet a particular insight worth noting was a remark by T. Boone Pickens when he said:
"I was with the CEO of Burlington Northern last week. He says they're going to natural gas. If the rail goes, they all have to go – trucking, everything."
This comes almost exactly one year after the announcement from Burlington Northern in which it declared would begin testing the use of liquefied natural gas in a limited number of trains.
In the release its CEO, Matthew Rose remarked, "the use of liquefied natural gas as an alternative fuel is a potential transformational change for our railroad and for our industry.
While Burlington Northern hasn't officially announced such a transition, one has to think such remarks by Pickens would indicate the test has gone well. Yet this move can have a major impact to not only Pickens but also to Buffett and Berkshire Hathaway.
The key takeaways
Berkshire Hathaway is clearly dependent on its railroad, energy, and utilities business, which represented nearly one third of the $485 billion in assets on its balance sheet, and these businesses generated roughly $8 billion of the $29 billion in pre-tax income last year.
But Berkshire could benefit twofold from expansion of the natural gas industry. First, its energy businesses will see direct impacts to their bottom lines as demand for continues to rise. Yet in addition, a switch to natural gas would lead to reduced expenses at the railroad -- it spent $4.5 billion on fuel alone in 2013 -- leading to increased profits.
All of this is to say expansion of the natural gas industry would benefit not only Pickens, but also the top and bottom lines of Berkshire Hathaway, adding one more line on the long list of Buffett's successes.