Warren Buffett, the renowned investor and chairman of Berkshire Hathaway (BRK.A 0.82%) (BRK.B 0.66%), is once again demonstrating his confidence in the long-term importance of fossil fuels. Berkshire Hathaway is deploying $3.3 billion from its substantial cash reserves to bolster its stake in Maryland’s Cove Point LNG, a liquefied natural gas export facility.
This move reinforces Berkshire Hathaway’s growing commitment to fossil fuels and sheds light on Buffett’s belief in the essential role of carbon-based energy in supporting the global economy. Let’s take a closer look at the recent investment and the reasoning behind Buffett’s conviction.
Expansion of Natural Gas Infrastructure Investment
Berkshire Hathaway Energy has struck a deal to acquire a 50% interest in Cove Point LNG from Dominion Energy (D 0.80%) for $3.3 billion in cash. This transaction will raise Berkshire’s ownership stake in the facility to 75%. The remaining 25% stake in the LNG export terminal is held by a subsidiary of Brookfield Infrastructure Partners.
Initially, Berkshire Hathaway purchased a 25% interest in Cove Point when it acquired Dominion Energy’s natural gas transmission and storage business for $9.7 billion in 2020. Brookfield Asset Management’s infrastructure fund also obtained a 25% interest in the facility for $2.1 billion in 2019.
Cove Point, which underwent a $4.1 billion conversion from an import facility to an export terminal completed in 2018, currently has the capacity to export 5.25 million tons of LNG annually. The fuel is sold under long-term contracts that serve 28 countries, ensuring a steady and predictable cash flow.
A Bold Wager on Fossil Fuels
Warren Buffett has a history of investing in fossil fuels. Berkshire Hathaway Energy manages an extensive network of 5,400 miles of natural gas pipelines, possesses 756 billion cubic feet of natural gas storage capacity, and holds interests in various LNG facilities, including Cove Point. Additionally, Berkshire Hathaway’s investment portfolio includes two oil stocks among its top ten holdings. The company owns 7% of Chevron (CVX 1.85%) and 25.1% of Occidental Petroleum (OXY 3.15%). Presently, Buffett’s Chevron shares are valued at nearly $21 billion, while the Occidental Petroleum shares are valued at approximately $13.4 billion. Chevron ranks as Berkshire’s fifth largest stock holding, representing 5.6% of its portfolio, while Occidental stands as the sixth largest, accounting for 3.6%.
Throughout this year, Berkshire has been steadily increasing its position in Occidental Petroleum, seizing the opportunity to acquire additional shares as the stock price declined alongside the broader slump in oil prices.
Berkshire’s substantial investment in fossil fuels indicates Buffett’s unwavering belief that the world will continue relying on oil and gas for the foreseeable future. This perspective aligns with long-term forecasts from prominent entities such as the International Energy Agency, the U.S. Energy Information Administration, and OPEC, which project steady to substantial demand growth for fossil fuels until at least 2050. While coal demand is expected to decline and oil consumption to eventually reach its peak, the demand for cleaner-burning natural gas is anticipated to rise, thereby supporting the increasing need for LNG export capacity.
Shell, a leader in LNG, predicts that global demand for LNG will surge from 397 million tons per year in 2022 to an estimated 700 million tons by 2040. Despite efforts by multiple developers to expand LNG capacity, a significant supply-demand gap is expected to emerge in the early 2030s, potentially leading to higher LNG prices. Berkshire’s position at Cove Point positions the company to benefit from these potential price increases as legacy contracts expire. Even without such price gains, Cove Point is expected to generate substantial and consistent cash flow for Berkshire in the coming years.
Capitalizing on the Enduring Dependence on Fossil Fuels
Buffett’s company continues to increase its commitment to fossil fuels, driven by the conviction that oil and gas will remain indispensable for many years ahead. By expanding its involvement in the energy sector, Berkshire Hathaway stands to generate considerable profits in the future. Through its energy subsidiary’s gas transportation and export activities, combined with the dividend income and share price appreciation from its oil stock investments, Berkshire will have additional capital to deploy and create value for its shareholders.
