Is It Time To Follow This Billionaire Investor Back Into Energy?

Brad Briggs's picture

Friday, February 26, 2016 - 10:30am

by Brad Briggs

Warren Buffett strikes again. We learned this past Tuesday the billionaire investor has been buying when there's "blood running in the streets" in the energy sector. 

It was no secret that Buffett and his investment team at Berkshire Hathaway (NYSE: BRK-B) are big fans of Phillips 66 (NYSE: PSX), the nation's largest refiner. Up until the fourth quarter of 2015, Buffett had steadily increased his stake in the company to the tune of 14.2% of shares outstanding (a position worth more than $5 billion). 

But the big surprise in Berkshire's latest 13F report revealed that instead of building onto their stake in Phillips 66, Buffett and his investment managers (Ted Weschler and Todd Combs) seem to have found a new darling in the energy space: Kinder Morgan (NYSE: KMI).

Kinder Morgan is the largest pipeline operator in the United States. And just as you'd expect, while the price of West Texas Intermediate (WTI) crude has tanked over the past year, so too has the price of Kinder Morgan shares.

Now that oil prices have rebounded somewhat in the past week (back to near $30), the talk on the Street is whether we've seen a bottom in oil prices. If this is true, then the move could prove to be another stroke of genius for the 85 year-old investing guru. If not, then it still may not matter much in the long run. This article in the Los Angeles Times highlights what Buffett likely sees in Kinder Morgan:

      Two contrarian lines of thought probably motivate these investors' actions, both based on the idea that when the mob is running in one direction, the smart investor runs the other way. One is that with oil trading near a 12-year low, the commodity is likely to be closer to the bottom of its price cycle than the top.

...

The second line of thought is that, whatever the direction of oil prices, Kinder Morgan has been unfairly punished. This is the notion offered by the company's executives, who argue that the market is making a mistake by valuing Kinder Morgan shares in tandem with oil prices, as has been the case throughout 2015. Kinder Morgan bills itself as the largest energy infrastructure company in North America, but oil production generated only 10% of its earnings before depreciation and amortization, the company says. The rest is from natural gas, a segment where business is strong.

In January the company announced a fourth-quarter loss due to asset write-downs and a lack of access to capital to fund its expansion plans. And in order to preserve cash flow, it also slashed its dividend by 75% at the end of 2015.

This may sound like bad news, but it actually puts the company in a good position to keep growing while setting the stock up for a nice bounce back if and when energy prices begin to rebound. Meanwhile, shares still carry a nice dividend yield north of 3%.

Buffett's entry into Kinder Morgan looks to be another stroke of genius. And regardless of what happens with oil prices in the short-term, this is a trade that risk-tolerant investors still have time to piggyback on.

​P.S. There's another move in the energy space that Warren Buffett has been making -- and this time he's in the company of heavy-hitting investors like Bill Gates, Peter Thiel and Elon Musk. My colleague Andy Obermueller has been telling his readers about this new energy revolution for months... Yet you'll hardly hear anyone in the mainstream financial press talk about it. To learn more about the mysterious device that Andy thinks could kill OPEC, coal and fracking, go here.

Brad Briggs does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.