By Warren Buffett's own admission, his investing style is not the most complicated thing. He looks for companies that have a strong, sustainable competitive advantage that generate sustainable earnings and holds on to them for years and years. Looking at the performance of Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) over the years, it's almost impossible to argue that it isn't an effective method for building wealth over the long term.
The energy space is littered with companies that have these traits. With so much attention going toward the natural gas boom and the potential it posesses in reshaping the American energy outlook, here are three companies that fit well into the Berkshire ethos that you may want to consider for your own portfolio: Enterprise Products Partners (NYSE:EPD), Cheniere Energy (NYSEMKT:LNG), and Chart Industries (NASDAQ:GTLS).
Enterprise Products Partners: One thing Buffett has always done when looking for investments, especially in the energy space, is to find ones that throw off free cash flow that he can use to build a float to fund further investment. Most producers in natural gas don't generate excess cash from operations. However, companies that transport natural gas and natural gas liquids are great at throwing off free cash flow, and very few of them do it better than Enterprise Products Partners.
Not only does Enterprise have a massive network of pipelines that links every natural gas liquids processing facility east of the Rockies, but its revenue from these pipelines and processing facilities are also largely supported by fixed-fee contracts that create a level of revenue and cash flow predictability that few other parts of the natural gas value chain can replicate. For half a decade, Enterprise has been generating more than enough cash from its operations to fund its generous dividend, as well as expand its existing footprint in the natural gas logistics business. With so much growth in U.S. gas production recently and a need to process and move that gas to end markets, Enterprise could provide a pretty large float for Buffett.
Cheniere Energy: I know, I know. A few years ago this company was the furthest thing from a Warren Buffett-esque stock. The amount of uncertainty that came with investing in a company that wanted to build a liquefied natural gas, or LNG, export facility with little to no financial backing and a less than stellar record on producing profits would scare away even some higher-risk investors. It's surprising what a couple of years can do, though.
Natural gas is transitioning from a regional product that was limited to pipeline transport and had huge price disparities to a truly global product thanks to LNG. Between now and 2030, the amount of LNG demand is expected to double to 523 million tons per year, and the U.S. will be a major player in the exporting business with an ample supply of cheaper gas. With one LNG export facility almost complete and more than 80% of its production capacity locked up in long-term, fee-based contracts, Cheniere Energy's revenue and EBITDA numbers should remain rather consistent and won't be drastically affected by commodity price swings. That sort of fixed-fee, tollbooth approach to revenue generation has long been a model Buffett has espoused.
The entire corporate structure of Cheniere Energy and its subsidiaries, Cheniere Energy Partners (NYSEMKT:CQP) and Cheniere Energy Partners Holdings (NYSEMKT:CQH), would probably be a sticking point for Buffett, but the fundamental business model is certainly there.
Chart Industries: This isn't exactly a direct investment in natural gas, but much of Chart's business is built on supplying equipment to anyone associated with natural gas logistics. Chart manufactures refrigeration and cryogenic equipment that's essential for processing natural gas into products such as propane and LNG. While this is a large, profitable component of the company's business -- it represented 32% of sales with a 29% gross margin -- the company's true bread and butter comes from manufacturing similar equipment for the processing, storage, and distribution of gases. On the surface, items such as storage tanks would seem like a rather commoditized industry, but Chart currently garners a 28% gross margin on these products and maintains healthy cash flow from all of its sectors.
What would make this company compelling to Buffett and the Berkshire Hathaway portfolio is that it has developed an industry-leading corner of an essential cog in several growing industries. Using industrial gases as a cash workhorse, it is steadily gaining a larger foothold in the LNG and medical gases segments that have allowed the company to increase operating income 41% annually for the past four years. With so much demand in LNG coming down the pipe, Chart's corner of the processing-equipment market will probably lead to even further profits for quite some time.
What a Fool believes
I can't guarantee that these are on Warren Buffett's buy list, but all three of them have traits similar to the other energy companies that are part of the Berkshire Hathaway family. Even if Buffett decides to pass on these companies, that doesn't mean you should as well. With Wall Street still acting a little down on everything energy lately, this could be a decent time to add one of these companies to your portfolio and start building a cash-generating machine of your own like Berkshire Hathaway's.