When the Oracle of Omaha makes a move, the investing world takes notice. So, when Berkshire Hathaway, the conglomerate run by famed investor Warren Buffett, recently increased its stake in a liquefied natural gas (LNG) facility in Maryland, it prompted questions about the state of the energy industry and America's long-term prospects as a global exporter of LNG.
Matt Stephani, president of Cavanal Hill Investment Management, Inc., shared his thoughts on the transaction and what it might mean for energy investors.
What deal did Berkshire Hathaway make?
Berkshire Hathaway Energy, a subsidiary of Buffett's company, already owned a 25% stake in the Cove Point liquefied natural gas facility located in Maryland on the shore of Chesapeake Bay. In early July, Berkshire announced it would buy an additional 50% of the facility for $3.3 billion in cash from Dominion Energy, bringing Berkshire's ownership stake to 75%.
What exactly is LNG and why is it significant?
Natural gas, a fossil fuel extracted from deposits deep underground, has become a critical power source producing heat and electricity for millions of homes and businesses worldwide. In many cases, natural gas can be transported through pipelines in its gaseous state. However, when it has to be transported great distances and reach locations without pipeline infrastructure, the gas first must be converted to liquid form (LNG). LNG takes up only 1/600th of the volume of its gaseous state, making it far more efficient to transport overseas on tanker ships. Then, once it reaches its destination, LNG must be converted back to gas (called regasification) before it can be used for energy.
Berkshire Hathaway operates thousands of miles of natural gas pipelines in the Eastern U.S. (among other energy-related assets). With its increased stake in Cove Point, it now owns one of only seven facilities in the country that can make and export LNG. Moreover, the Cove Point facility is especially strategic in that it's close to the Marcellus Shale, one of the most prolific gas fields in the world.
Why is Berkshire strengthening its position in LNG?
The short answer is that there is high global demand for natural gas and it's likely to keep growing, said Stephani.
To offer more background, scientific advancements in natural gas extraction, combined with geopolitical events of recent years, have turned the U.S. into one of the world's leading exporters of LNG, a trend that Stephani's team has followed for years.
In the early 2000s, shale drilling and hydraulic fracturing ("fracking") techniques made natural gas more accessible, and as a result, America has nearly doubled its output over the last 20 years. At the same time, however, much of the rest of the world has struggled to maintain a steady supply of natural gas. Populous countries such as Japan, South Korea and most of Western Europe have experienced gas shortages and extreme price volatility. These problems were recently exacerbated in Europe by Russia's war on Ukraine, as Russia, traditionally a major supplier of natural gas, cut off supplies to multiple EU countries in 2022 due to political conflicts. Concurrently, two critical gas pipelines from Russia, Nord Stream 1 and 2, were mysteriously sabotaged and are still not operational.
Meanwhile, some countries are discontinuing their own production of natural gas due to environmental concerns. Earlier this year, for example, the Netherlands made the decision to close the Groningen gas field (the largest in Europe), based on the high risk of triggering earthquakes.
All of these factors combined mean that Europe and other parts of the world are becoming increasingly dependent on natural gas imports to serve their people. The U.S. is in a prime position to meet its own needs and help with the shortage overseas, with LNG being the key method of delivery, Stephani explained. This helps explain why Berkshire Hathaway and other investors are betting big on natural gas, he noted.
What are the key takeaways for investors?
Berkshire's latest investment in LNG is yet another indication that Buffett believes use of natural gas—and fossil fuels, in general—will continue to grow, despite the attention that alternative energy receives. And he's not alone in this regard. The U.S. Energy Information Administration recently predicted that America's LNG exports will increase 152% by 2050.
"While many nations are working toward alternative energy solutions, it will be a slow transition and fossil fuels will remain important for decades," Stephani agreed. Natural gas is relatively cheap in the U.S., particularly when compared with the cost of gas in Japan, South Korea and Europe. This makes U.S. gas an attractive option for countries that need imports to maintain energy stability, he continued.
As the U.S. grows its exports of LNG to Europe and Asia, it will benefit from job creation in the construction (building LNG facilities), transportation (pipelines and shipping), and natural gas exploration and production industries, according to Stephani. He believes cheap, plentiful gas is poised to become an economic driver for the U.S. for years to come, which has important implications for investors.
"There is a lot of money to be made exporting cheap gas from the U.S., which continues to make LNG an attractive investment opportunity," Stephani said, "and Berkshire's increased investment in Cove Point demonstrates its appeal to one of the world's greatest investors."
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