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Buffett’s Return To Deal Making Could Sign Pure Gasoline Value Backside

Bloomberg generated 10 year price chart of natural gas spot futures prices as of July 6, 2020 … [+] BLOOMBERG FINANCE L.P. BLOOMBERG


Berkshire Hathaway Energy’s $10 billion acquisition of Dominion Energy’s natural gas transmission and storage assets may do more than just herald Warren Buffett’s return to the marketplace; it could also be signaling a long term bottom in natural gas prices.

As the chart above shows, natural gas spot futures prices rarely stay below two dollars for very long. In fact, natural gas futures prices are currently below the two dollar threshold for only the third time in the past 10 years. The first time there was a breach of the two dollar price level was in 2012, when the spot futures price stayed under two dollars for all of two weeks. In the winter of 2015/16, when counted as a single wintertime event, prices stayed below two dollars for a total of 12 weeks, two weeks were in late 2015 and, after a short lived rally above two dollars in the very beginning of 2016, prices stayed below two dollars for another 10 weeks. The current price plunge below two dollars began in January 2020 due to unusually mild winter temperatures in the eastern United States. Prices currently remain subdued and below two dollars, primarily from the combined effects of plentiful natural gas supplies in storage and because of reduced demand due to the effects of the Covid-19 crisis.

Commodity prices are legendary for their cyclical nature, and the history of natural gas prices may be the epitome of commodity price cyclicality. The mantra of “low prices getting rid of low prices” could be proven true once again on the not too distant time horizon. All it would take to put a floor in today’s natural gas markets is some level of economic recovery from the current depths of the Coronavirus damaged economy. A bit of economic growth coupled with the onset of a cold winter his year would likely send natural gas prices higher, perhaps much higher from current historic low price levels. Neither an economic recovery nor the onset of a cold winter will happen overnight, but both are almost certain to happen at some future time, and natural gas prices will react accordingly.

To be sure, Warren Buffett is not betting on a natural gas price rally; he is adding to an energy transmission and storage portfolio that operates much like a railroad. The commodities and products that both railroads and pipelines carry need to be transported regardless of their underlying price. It is no coincidence that the Berkshire Hathaway portfolio owns both pipelines and railroads; both are annuity-like in their cash generation through both bull and bear commodity markets.

The Berkshire Hathaway Energy team certainly knows that natural gas prices are at a significant low point relative to historical norms. They also know that while energy prices, high or low, shouldn’t materially disrupt their cash flow streams from the energy transmission assets they own, there is almost always an uptick in the value of transmission assets when the value of the commodities they transport rises.

The Buffett magic could be at work again, potentially signaling a long term cyclical low in the price of both natural gas transmission assets and, perhaps, of natural gas itself.

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