On July 5, Warren Buffett’s Berkshire Hathaway revealed that it is acquiring Dominion Energy’s gas transmission and storage assets in a deal worth $9.7 billion. These assets included Dominion’s natural gas transmission lines, gas transportation capacity, and gas storage capacity.
After the deal, Buffett’s investment firm will also have partial ownership of Dominion’s liquefied natural gas export-import business and storage facility. Berkshire Hathaway expects the transaction to complete in Q4.
Why it’s a masterstroke
Buffett always tries to invest in companies with moats around their business models and trustworthy management. Also, he always pays close attention to the overall future growth potential of their respective industries. Due to the fears about rising challenges in the airline industry because of the ongoing pandemic, Berkshire Hathaway sold all its airline stocks in the first quarter.
While I might not completely agree with Buffett’s decision to sell all his airline stocks, I consider his move to invest in the energy sector a masterstroke. Let’s understand why.
Possibilities in the energy sector
Earlier this year, the global energy demand suddenly slumped, as countries across the world imposed closures to fight the COVID-19 outbreak. Most of these countries are now on their way to reopen their all economic activities soon, causing a rapid surge in the energy demand. This expected rise is likely to benefit energy companies.
It’s important to note that most energy companies tend to have extraordinarily high-profit margins as compared to companies belonging to several other capital-intensive industries.
For example, TC Energy (TSX:TRP)(NYSE:TRP) — the Canadian energy firm — reported a solid 32.5% adjusted net profit margin in the first quarter. By comparison, its peer Enbridge’s (TSX:ENB)(NYSE:ENB) had a 13.9% adjusted net profit margin during the same quarter. While Enbridge’s net profitability was much lower than TC Energy, it was still far better as compared to the profitability of most autos and steel producers.
Interestingly, energy companies like TC Energy and Enbridge also offer handsome dividends to its investors. While TC Energy currently has a 5.5% dividend yield, Enbridge has a much higher 8% dividend yield.
In my recent article about these two energy stocks, I’d highlighted how TC Energy doesn’t expect its 2020 financial and operating performance to get affected by the pandemic. Enbridge also doesn’t expect the pandemic to hurt its utility business this year.
After the energy demand declined during the COVID-19-related closures period, the shares of energy companies fell sharply. As of July 3, TC Energy has lost 16%, and Enbridge has seen 19.3% value erosion year to date. Meanwhile, the S&P/TSX Composite Index has slipped 8.6%. The recent drop in energy stocks makes them even more attractive.
Both TC Energy and Enbridge could turn out to be great investments in the long term. These companies make a big chunk of their revenue from the natural gas transportation business in North America. In my opinion, expectations of a sharp rebound in energy demand and energy companies’ strong profitability and handsome dividends could be enough reasons to invest in the energy sector right now.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Jitendra Parashar has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Enbridge and recommends the following options: short January 2021 $200 puts on Berkshire Hathaway (B shares), long January 2021 $200 calls on Berkshire Hathaway (B shares), and short September 2020 $200 calls on Berkshire Hathaway (B shares).