Berkshire Hathaway: Cove Point Deal Fits With Focus on Energy and Utilities
We see no reason to alter our fair value estimate for Berkshire Hathaway stock.
Berkshire Hathaway Stock at a Glance
- Fair Value Estimate: $370
- Morningstar Rating: 4 stars
- Morningstar Uncertainty Rating: Low
- Morningstar Economic Moat Rating: Wide
We see no reason to alter our fair value estimate for Berkshire Hathaway BRK.B following news that the company has agreed to acquire Dominion Energy’s D 50% stake in Cove Point, a U.S.-based export, import, and storage facility for liquefied natural gas. The insurer’s utilities and energy segment, Berkshire Hathaway Energy, acquired nearly all of Dominion’s natural gas transmission and storage operations for around $4.0 billion ($9.6 billion when including assumed debt) in July 2020. That deal included BHE’s assumption of a 25% economic stake in Cove Point, with Dominion retaining its 50% stake and the other 25% held by Brookfield Infrastructure Partners BIP.
We see the energy and utilities sectors as one of Berkshire’s prime areas of focus for investment but have bemoaned its lack of acquisition activity over much of the past decade, given the premium valuations ascribed to many of the types of firms the insurer (and its subsidiaries) would like to acquire, especially in utilities. In our view, Berkshire has generally pursued deals and investments that could generate 10%-12% annual returns but has been willing to settle for less in this space (where allowed returns on equity run in a 9%-11% range) or where it can secure preferred stock, as well as warrants to purchase common stock, as part of the transaction.
As such, the $3.3 billion BHE is paying for the 50% stake in Cove Point—which according to our analysts is equivalent to around 11 times its projected 2025 EBITDA—seems a bit on the richer side, especially considering where natural gas prices are right now. However, some of the premium BHE is paying is for the controlling stake it will now hold in the operations. Berkshire expects to fund the deal with cash on hand, including cash raised as part of the liquidation of certain investments, with recent sales of BYD standing out the most here.
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