To say natural gas is facing challenges would be an understatement. It’s just the kind of environment that appeals to Warren Buffett. Sure enough, last Sunday Berkshire Hathaway Energy, a division of the Sage of Omaha’s giant investment vehicle, offered $4 billion plus debt for most of US utility firm Dominion Energy’s pipelines for the fossil fuel. That looks solid enough to overcome the industry’s leaky short-term future.
Natural-gas prices were already under pressure as oil drilling, which extracts natural gas as a byproduct, overflowed an already depressed market. Producers started to burn it off rather than sell it. Meanwhile, a drop in demand left utilities’ storage tanks full. The US Energy Information Administration predicts US consumption will fall 3.6 per cent in 2020, largely due to an almost 9 per cent contraction in the industrial sector. By the end of June, natural-gas futures had collapsed to a near 25-year low.
But a few things are helping. Oil drilling has started to slow as big producers pull back on investment, keeping ancillary natural gas in check. Granted, it doesn’t have the growth prospects of solar or wind power. But gas emits less carbon than other fossil fuels, which should give it better medium-term prospects. It will continue to replace coal as an energy source, for example. And it doesn’t face the drop in demand that oil does as electric vehicles replace the internal combustion engine; that’ll help gas demand grow three times faster than black gold through 2040, reckons Williams Companies, which operates a large US pipeline network.
And Buffett appears to be getting a good deal for the Dominion assets. The $9.7-billion enterprise value means Berkshire Hathaway Energy is paying some 10 times EBITDA. That’s a roughly 15 per cent discount to Williams’ current multiple and a fifth less than a recent pipeline deal by Brookfield Super-Core Infrastructure Partners.
Assuming natural-gas prices don’t sink even lower, Buffett should be able to pipe through a decent return.