Warren Buffet's company, Berkshire Hathaway (NYSE:BRK-B), is drowning in cash. It holds the fourth-largest cash hoard in America, behind only Apple, Microsoft, and Google. What's more, Buffett's empire of cash-spewing companies is growing that money pile to the tune of $25 billion per year.
I've previously written about utilities and MLPs Buffett might want to buy. Given that Buffett said in May that Berkshire Hathaway Energy is prepared to make a $50 billion acquisition, and given that Berkshire has added $10 billion to its coffers since then, why hasn't Buffett made any large purchases lately?
Many analysts believe Buffett might be ready to make huge investments into the energy sector. Specifically, analyst firms Bloomberg and Robert W. Baird believe Buffett could be eyeing pipeline operators such as Williams Partners (NYSE:WPZ), ONEOK Partners (NYSE:OKS), and MarkWest Energy Partners (UNKNOWN:MWE.DL).
5 Reasons Buffett might buy MarkWest
The first reason Buffett might be interested in MarkWest's is its dominant footprint in the Marcellus and Utica shales.
The Marcellus and Utica shales are the fastest-growing gas formations in the United States, having expanded production by 15-fold and tenfold in the last seven and two years, respectively.
Production from the Marcellus and Utica shales is expected to increase by 112% over the next decade, meaning ownership of the transportation infrastructure in these areas holds immense profit potential.
MarkWest own 43% and 73%, respectively, of the gas processing capacity in the Utica and Marcellus shales. By the end of 2015, the company plans to expand this capacity by 100% and 62% respectively.
In fact, MarkWest is the No. 1 processor and fractionator in the hyperprolific Marcellus and Utica shales, as well as the Haynesville shale that is expected to supply gas for LNG exports.
Reason 2: MarkWest has 3 major growth catalysts
These expansion projects will not only make MarkWest an increasingly dominant player in American natural gas and LNG exports, but also give Berkshire access to another major energy megatrend, natural gas liquids (NGLs) such as ethane and propane.
In fact the fast growth of natural gas has resulted in plunging NGL prices that has caught the attention of the petrochemical industry, which is now constructing or expanding 148 plants along the Gulf coast to take advantage of the cheaper input prices and export opportunities. In fact analyst firm IHS Chemical estimates that $125 billion will be spent on these efforts.
What's more analyst firm ICF International expects $56 billion in midstream infrastructure (pipelines, processing, and fractionating plants) will be needed to supply NGLs to these customers. With that large of a potential market and MarkWest's dominant position in the Marcellus and Utica formations, MarkWest offers Buffett an enormous opportunity and brings me to my third reason.
Reason 3: MarkWest is a great place to put cheap capital to work
Berkshire Hathaway Energy's access to cheap capital (it can borrow from Berkshire's insurance subsidiaries at under Treasury rates) could greatly improve both the growth rate and profitability of MarkWest's expansion plans.
As Baird analyst Ethan Bellamy recently told Bloomberg, "You would be hard pressed to find a firm that could produce more value relative to its footprint if given a blank checkbook than MarkWest."
With Markwest currently constructing 21 new processing and fractionating plants, Berkshire's cheap capital could easily cover and expand the partnership's capital expenditure budget which is expected to be $2 billion to $2.3 billion for this year.
This might potentially allow MarkWest to accelerate its growth plans which are already expected to generate significant growth. For example, during its most recent earnings report MarkWest disclosed that the volume of gas processed through its systems was growing at impressive rates.
- Total system volume up 52% compared to last year
- Marcellus volume up 95%
- Utica volume up 251%
Reason 4: Lack of a general partner makes MarkWest cheaper to buy
|Company/MLP||Enterprise Value $Billion|
|MarkWest Energy Partners||15.96|
|Access Midstream Partners||15.37|
|Total Cost to buy Williams||103.6|
|Total cost to buy ONEOK||38.58|
MarkWest is one of the few midstream MLPs without a general partner. This makes acquiring the partnership much cheaper for Buffett. This is because incentive distribution rights, or IDRs, give a general partner the rights to 50% of a MLP's marginal cash flow once a certain distribution level has been achieved. Since Buffett is primarily interested in maximizing cash flow, purchasing a MLP without also purchasing its general partner's IDR means losing half the cash flow potential of the investment.
As seen in the table, Williams Partners (which is merging with Access Midstream Partners (UNKNOWN:ACMP.DL) this quarter) would cost double what Buffett has thus far indicated he's willing to spend. ONEOK Partners is within the $50 billion acquisition cap, but also purchasing general partner ONEOK (NYSE:OKE)would drive the cost to more than twice as much as MarkWest, whose growth potential in the Marcellus and Utica shales is greater than its competitors.
Reason 5: Buffett already owns gas pipelines
Finally, the fifth reason I think it makes sense for Berkshire to buy MarkWest is because they already own plenty of midstream assets and thus know how to operate them efficiently. For example, through its pipeline group, Berkshire Hathaway Energy operates 16,400 miles of natural gas pipelines. This makes it easier to integrate MarkWest's assets efficiently and for maximum benefit to Berkshire's cash flows and profitability.
Reasons Buffett may not buy MarkWest
Readers shouldn't misunderstand me. I am not saying I think that Buffett will buy MarkWest, only that I think there are persuasive reasons that he might. However, there are two reasons why Buffett might choose not two. First is the fact that Berkshire hasn't ever purchased a midstream MLP, indicating that perhaps Buffett is uncomfortable with the idea and prefers to make acquisitions into sectors he is more familiar with.
Second, typically Buffett likes to see high returns on equity, 10+%, and MarkWest's 2.2% ROE is much lower than the industry average of 9.3%.
While true that Buffett has never purchased an MLP, and the return on equity for the midstream MLP industry is a bit lower than what Buffett usually acquires, I think the reasons for Berkshire to purchase MarkWest Energy Partners more than offset these two factors. In my opinion MarkWest's dominant position and rapid growth in the fastest-growing and most important gas formations in America, as well as its much cheaper purchase price than the competition make it a tempting buyout target for Buffett due to its enormous future cash flow and profit generating potential.