Why Warren Buffett increase stakes in LNG?

A few days ago, Berkshire Hathaway, led by Warren Buffett, increased its stake in $Occidental(OXY)$ Petroleum , raising its stakes to 25%. Buffett's favoritism towards Occidental Petroleum is well-known, and with the endorsement of the stock market guru, Occidental Petroleum is one of the strongest performing companies in the energy sector.

However, Buffett also endorsed an oil and gas company.

On July 10th, $Berkshire Hathaway(BRK.B)$ Energy agreed to acquire a 50% stake in $Dominion Resources(D)$ energy's Cove Point liquefied natural gas (LNG) facility in Maryland for $3.3 billion.

After the completion of the transaction, Berkshire Hathaway will own a 75% limited partnership interest in Cove Point LNG. As a result, Buffett also became one of the few controllers of the seven existing LNG export facilities in the United States. In other words, it is not an exaggeration to call him the "oil and gas tycoon."

Cove Point LNG – Mechademy

But why did Buffett increase his holdings in oil and gas companies?

We believe the key to this transaction is not Buffett's increased stake, but Dominion's decision to sell. As a company with numerous oil and gas limited partnership assets, Dominion has made relatively aggressive investments in recent years. Although Cove Point is a significant LNG limited partnership in the Mid-Atlantic region and brings in decent cash flow for the company, it was acquired through financial leverage. After the energy price correction in 2022, the company's financial leverage increased. Dominion planned to sell these assets in the second half of 2022 when prices may have been higher, but they did not find a suitable buyer.

As of the latest financial report, Dominion's current assets are $9.61 billion, of which cash assets are only $2.4 billion, while current liabilities amount to a high $12.76 billion.

In the current high-interest-rate environment, the high debt ratio poses a significant burden with substantial annual interest expenses.

The estimated net after-tax cash flow from the sale of these assets is approximately $3.3 billion, which Dominion will use to repay its debts, including a $2.3 billion term loan guaranteed by North Bay non-controlling interests. The company's adjusted Funds from Operations (FFO) to debt ratio will increase by approximately 0.7%.

Furthermore, Berkshire Hathaway practices its investment philosophy within its circle of competence. It already held a 25% stake in Cove Point, and now it has expanded its ownership to 75%, effectively becoming the controlling entity of this limited partnership.

Berkshire Hathaway did not choose to buy at the peak in 2022 but waited for the price to decline before making a bottom fishing move. Although Berkshire Hathaway has abundant cash flow, it did not invest in technology companies like $Microsoft(MSFT)$ or $NVIDIA Corp(NVDA)$ . This does not mean that these technology companies lack investment value; they simply fall outside Berkshire Hathaway's circle of competence. Therefore, the investment decision it made is not surprising.