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
BRK.B Cash and Equivalents (Quarterly)
With $55 billion in cash and Buffett having stated in the past
that "we will
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
Berkshire Hathaway Energy
On April 30, MidAmerican Energy was rechristened Berkshire
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
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
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
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.
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.
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
and its general partner
Plains GP Holdings
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
Source: Plains All American Pipelines 2014 Analyst Meeting
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
(P/S of 1.06), which Berkshire Hathaway owns 0.92% of in its
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.
to access a FREE investor alert on the company we're
calling the "brains behind" the technology.
Is This Warren Buffett's Next Big Buy?
originally appeared on Fool.com.
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