Morningstar

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 logo on cellphone.
Securities In This Article
Dominion Energy Inc
(D)
Berkshire Hathaway Inc Class B
(BRK.B)

Berkshire Hathaway Stock at a Glance

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.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Greggory Warren, CFA

Strategist
More from Author

Greggory Warren, CFA, is a strategist, AM Financial Services, for Morningstar*. He covers the traditional US- and Canadian-based traditional asset managers, as well as the alternative asset managers and Berkshire Hathaway. Over the course of his career, Warren has covered not only financial services names but companies from the consumer staples and consumer cyclicals sectors, and been involved in portfolio stock selection and management.

Prior to joining Morningstar in 2005, Warren worked as a buy-side equity analyst for more than eight years, covering consumer staples and consumer cyclicals. Before assuming his current role at Morningstar in 2017, Warren covered the financial-services sector as a senior analyst since late 2008. Prior to that time, he covered the non-alcoholic beverage manufacturers and distributors, packaged food firms, food service distributors, and tobacco companies.

Warren holds a bachelor's degree in accounting and English from Augustana College. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Society of Chicago.

During 2014-19, Warren was selected to participate each year on the analyst panel at Berkshire Hathaway’s annual meeting, asking questions directly of Warren Buffett and Charlie Munger. The analyst panel was disbanded ahead of Berkshire’s 2020 annual meeting. Warren also ranked second in the investment services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey in 2013, the last year the survey was conducted.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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