After mostly sitting on his hands in the first quarter, Warren Buffett finally swung at a pitch amid the pandemic, scooping up nearly US$10 billion worth of natural gas storage and transmission assets from Dominion Energy. The deal is slated to close in the fourth quarter of this year and will give Berkshire Hathaway control of 18% of interstate natural gas transmission in the U.S.
Warren Buffett finally picks up an elephant
The “elephant-sized” deal is one that ought to be applauded by Berkshire shareholders, who’ve been patiently waiting for Buffett to do something with his firm’s growing mountain of cash.
A US$10 billion Dominion gas asset deal fits the definition of an elephant by almost any other firm’s standards, but for Berkshire, it’s hardly a massive, needle-moving move, given the magnitude of the cash hoard that’s continued to swell to record levels over the years.
Regardless, Warren Buffett’s big bet on natural gas ought to be viewed by Canadian value investors as a hint that gas could play a major role in powering the future. The relatively clean commodity has been under a considerable amount of pressure over the last several months thanks in part to the COVID-19 crisis, making the elephant-sized natural gas deal a classic Buffett value bet that investors should take notice of.
Is natural gas the place to be for Warren Buffett fans?
While following an investment guru like Warren Buffett into or out of individual stocks is a risky endeavour that’s unlikely to result in excess risk-adjusted returns over the long run, I think it makes sense to consider Buffett’s moves as a sign of where the macro opportunities may lie.
If you’re a top-down investor, one can’t help but think that a high-quality gas and liquids pipeline like TC Energy (TSX:TRP)(NYSE:TRP) is a natural way to mirror Warren Buffett’s bullishness on natural gas storage and transmission.
TC Energy represents one of the more resilient and higher-quality pipeline plays on the TSX Index, with its geographically diversified mix of assets, its promising pipeline of compelling growth projects, and the terrific management team that’s done an applaud-worthy job of mitigating risks.
A natural gas play that’s more like a utility
I’m not a huge fan of betting on firms that are sensitive to underlying commodity price fluctuations, but TC Energy is a different beast given its “utility-like” characteristics and the regulated nature of many of the firm’s operating cash flow streams. The company derives around 95% of comparable EBITDA from either regulated assets or from long-term contracts, making shares of TRP less likely to exhibit off-the-charts volatility relative to its less-regulated midstream peers in the space.
While TC Energy is undoubtedly an energy play, I see it as more of a “growthy” utility, given its highly regulated nature and its low 0.73 five-year beta that makes the stock more likely to zig when the markets zag.
TC Energy is also dirt cheap at the time of writing, with TRP stock trading at a modest 1.9 times book, 4.1 times sales, and 11.5 times EV/EBITDA, all of which are considerably lower than the stock’s five-year historical average multiples of 2.4, 3.8, and 21.3, respectively. That’s value that would probably make Warren Buffett lick his chops.
The stock sports a bountiful, well-covered 5.6%-yielding dividend and ought to be strongly considered by long-term investors who want to follow in the footsteps of Warren Buffett.
Many pundits are likely to criticize Warren Buffett for upping his bets in the “boring” and “out-of-favour” arena of natural gas, as the world continues its transition towards sustainable energy sources. But if you’re in the belief that gas will stay a significant role for decades to come and want to get rich with dividends while you wait for natural gas prices to bounce back after its latest slump, it’s hard to match the value proposition offered by TC Energy stock at this juncture.
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Fool contributor Joey Frenette owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short September 2020 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and long January 2021 $200 calls on Berkshire Hathaway (B shares).