ABERDEEN, SCOTLAND – The energy sector has been a hotbed of market unrest over the past year: a constantly evolving, volatile warzone enriching and ruining investors in equal measure.
Last April negative oil prices busted on to the scene for the first time in human history… then we saw renewable energy stocks blow the roof off with some spectacular rallies… then oil had its redemption arc with a surging return to $70 oil prices… and now accusations of fraud have begun to dog some of the green stock darlings which consumed speculators so violently over the summer.
Against such a backdrop, it’s worth taking note of what the major players have been up to – how they’ve reacted and tried to take advantage of the chaos. My colleague Will Dahl made some interesting observations on the activities of Warren Buffett over this period. Like him or not, he’s arguably the most famous investor in the world, and as his tactics are followed and emulated by so many, it’s worth taking a look at both how he’s behaved in the energy space recently, and how he’s presented that behaviour to the world.
I’ll leave you with Will for now – back tomorrow…
Looking back on Buffett’s $10 billion post-Covid bet
By Will Dahl for Southbank Investment Daily
Last June Berkshire Hathaway announced a $9.7 billion deal to acquire Dominion Energy’s gas pipeline and storage network.
At the time it was considered a conservative, or even defensive, investment. As Darren Pollock of Cheviot Value Management put it: “It’s not something that’s going to move the needle from a balance-sheet standpoint, but it’ll produce several hundred million dollars a year in net income to Berkshire.”
That forecast was accurate – Buffett’s annual letter celebrated $42.5 earned in 2020, of which a few hundred million would amount to a rounding error.
Even so, the multi-billion-dollar investment demands the question: what future does Buffett see for fossil fuels?
Clues in Buffett’s 2021 letter to shareholders
Interestingly, Buffett never mentioned Dominion Energy in his 2021 letter to Berkshire Hathaway shareholders, nor did he mention the $9.7 billion Berkshire paid for the pipeline.
He doesn’t mention gold, or the gold mining firm Barrick, which caused a flurry of speculation last August when Berkshire revealed a $562 million position.
What he does mention are… renewables.
Speaking of Berkshire Hathaway Energy, the utility company Buffett likes to laud as one of Berkshire’s four “jewels”, Buffett had this to say:
Let me tell you about one of BHE’s endeavors – its $18 billion commitment to rework and expand a substantial portion of the outdated grid that now transmits electricity throughout the West. BHE began this project in 2006 and expects it to be completed by 2030 – yes, 2030.
The advent of renewable energy made our project a societal necessity. Historically, the coal-based generation of electricity that long prevailed was located close to huge centers of population. The best sites for the new world of wind and solar generation, however, are often in remote areas.
Now, this interest in renewables isn’t because Buffett has become a social justice warrior.
Buffett has never believed in imposing his political or moral beliefs on Berkshire Hathaway.
He may beg Congress to raise his taxes, and argue his secretary shouldn’t pay a higher tax rate than he does, but when it comes to investing, ideals have never coloured his vision.
“I don’t believe in imposing my views on 370,000 employees and a million shareholders,” Buffett declared in 2018.
Moves like acquiring the Dominion Energy pipeline and scooping up millions of shares of a gold miner grab a disproportionate amount of media attention compared to the long game Buffett likes to play. The Dominion Energy deal should be read as a conservative investment – the world’s most famous value investor buying a stake in a battered sector that is so undervalued it can benefit from going from bad to less bad.
Meanwhile, the natural gas boom, while not an acceptable end point for environmentalists, has had the effect of choking the coal industry. With hundreds of coal plants shuttered since 2015, their replacement with an energy source 50-60% cleaner has granted enormous relief to the climate.
Again, this probably isn’t a major factor in Buffett’s thinking. But the situation reflects the reality of an inexorable trend towards renewables that’s only accelerating.
It’s a trend that Buffett has been a big part of.
Last year, the Donald Trump administration approved Buffett’s deal with L.A.’s local government to build a 7,100-acre solar farm – the US’s largest to date. It will meet an estimated 6% to 7% of L.A.’s total electricity needs – and most important of all, it produces electricity at a cost of just $33 per megawatt hour, which is more than a third cheaper than the maximum cost MIT scientists say is needed for solar to be viable.
It’s also half the energy cost of a natural gas plant.
This isn’t Buffett’s only foray into green energy. PacifiCorp, the largest holding of Berkshire Hathaway, announced plans in 2019 to shutter 20 out of 24 of its coal plants and replace them with renewable energy sources to generate another 8 GW of clean energy power.
As far back as 2014, Buffett announced plans to pour another $15 billion in clean energy. This is on top of his plans to make the state of Iowa into “the Saudi Arabia of wind power”.
In fact, in his 2019 letter to Berkshire Hathaway shareholders, Buffett revelled in the advances in wind power his company is overseeing. Thousands of Iowans are paying cheaper electricity bills as a result of Berkshire Hathaway Energy’s (BHE’s) advances in storing wind power.
Berkshire Hathaway investors are the winners alongside Iowans. BHE and its subsidiaries have grown earnings from $122 million to $3.4 billion in the 21 years since Buffett acquired the business.
As for Dominion Energy? It sees the writing on the wall, with plans to build the largest offshore wind power project in the US, while aiming to power an additional 750,000 homes with solar power.
Conservative investments in energy transport companies shouldn’t belie the green energy revolution that is even blossoming in Trump’s America. Not for nothing was Invesco Solar ETF (TAN), the best-performing ETF in 2020, up 191% for the year.
Of course, if the sector as a whole is up roughly 191% for a year – it stands to reason that a few standout performers in the industry have done far better. Our energy expert at Southbank Investment Research, Exponential Energy Fortunes editor James Allen, is tracking several opportunities on that front…
All the best,
Boaz Shoshan
Editor, Capital & Conflict
Category: Geopolitics