"Opportunity Hunter" Seizes $10 Billion Deal to Control 18% of US Gas Transmission

Warren Buffett invests in natural gas

With the collapse of gas markets and companies' bankruptcies, Warren Buffett invests in natural gas

Berkshire Hathaway, owned by the famous American billionaire Warren Buffett, known in economic circles as the "opportunity hunter," announced that it has purchased the natural gas assets of Dominion Energy in a deal worth $10 billion. This is Berkshire's first investment since the outbreak of the COVID-19 pandemic and the collapse of stock markets.

Gas prices have collapsed in the United States in recent months, to the point that they were sold at negative prices in some markets. This has resulted in the bankruptcy of several companies, the most recent of which was one of the largest companies in this sector, Chesapeake. Global gas prices have also collapsed, to the point that LNG prices in India, China, and Turkey are lower than those for pipeline gas.

 Is this what encouraged Buffett to invest in gas? Low prices and corporate bankruptcies mean that assets are very cheap, on the one hand, and production has fallen to the point where prices will begin to rise, and this price increase will raise the value of these assets, on the other hand. Furthermore, the collapse in oil markets has reduced oil production, and subsequently reduced associated gas production. This has resulted in a significant decline in gas production, which will raise prices in the future.

However, what is striking is that what Buffett did contradicts the above: Despite the above logic, Dominion is more of a gas services company than a producer. What does this mean? What he purchased are pipelines, tanks, and gas distribution channels. Are these complementary assets to Oxy, the oil, gas, and LNG producer, a large portion of which he purchased months ago when Oxy acquired Anadarko? Or because it's a service company, generating consistent cash flows? Or both?

The conglomerate indicated it spent $4 billion to purchase Dominion Energy's natural gas transportation and storage assets, including the assumed debt, bringing the total deal to approximately $10 billion, according to CNBC.

Bloomberg was more specific, stating that the deal is worth $9.7 billion, and that Dominion will use $3 billion of the proceeds to buy back shares. Warren Buffett's group will also acquire a 25 percent stake in Cove Point LNG, a Maryland-based LNG export company, half of which Dominion will invest.

For Berkshire Hathaway, this move significantly expands its presence in the natural gas sector. With the purchase, Berkshire Hathaway Energy will carry 18 percent of all interstate natural gas transportation in the United States, compared to only 8 percent currently, according to CNBC.

At his annual shareholders meeting last May, Buffett revealed that Berkshire Hathaway had accumulated a record $137 billion in cash amid the financial market downturn, and that he hadn't seen many favorable deals despite the sharp decline in the stock market.

"We haven't done anything because we don't see anything attractive to do," Buffett explained, noting that the swift actions taken by the Federal Reserve this year mean that companies can raise more funding in the public markets than they did during the financial crisis of 2008 and 2009.

For Dominion, the move is part of a series of steps toward transitioning to a financially regulated utility company focused specifically on clean energy production from wind, solar, and natural gas. Following the deal, Dominion expects 90 percent of its future operating profits to come from utilities that provide power to more than 7 million customers in states such as Virginia, North and South Carolina, Ohio, and Utah.

Dominion also announced that it was canceling the Atlantic Coast Pipeline project with Duke Energy. The $8 billion project faced increased regulatory scrutiny and delays that inflated projected costs and raised doubts about its economic viability.

As a result of the sale and its aftermath, Dominion warned that it now expects its 2020 operating earnings to be between $3.37 and $3.63 per share, compared to a previous forecast of $4.25 to $4.60 per share. The company also plans to reduce its fourth-quarter dividend to 63 cents per share, down from 94 cents per share in each of the first two quarters of the year, and expects to pay it in the third quarter.

Dominion's dividend payouts currently equal approximately 85 percent of its operating earnings, but after the deal, the company is targeting an operating dividend payout of 65 percent, saying the latter ratio is more on par with peers.

Under the terms of the deal, Berkshire Hathaway Energy will acquire 100 percent of Dominion Energy Transmission, Questar Pipeline, and Carolina Gas Transmission, as well as 50 percent of the Iroquois Gas Transmission System. Berkshire will also acquire a 25 percent stake in Cove Point LNG, an LNG import, export, and storage facility, one of six LNG export terminals in the United States.

Berkshire Energy will pay $4 billion in cash for the assets and assume $5.7 billion in debt. Dominion plans to use approximately $3 billion of after-tax proceeds to repurchase its own shares later this year. The deal is subject to regulatory approval and is expected to close in the fourth quarter of this year.

At the same time, Buffett is considered one of the world's most successful investors. Most authorities, analysts, and observers point out that one of his most prominent skills is his ability to make the right decisions at the right time and seize opportunities that many others only see too late. Indeed, he has built most of his wealth and reputation by investing in areas that are not typically popular among investors.