One notable development during this recession and the steep decline in stock prices has been Warren Buffett staying on the sidelines. He had a record-level of cash - $137 billion - but at his annual meeting, remarked that no compelling bargain had materialized. Last week, Buffett finally pulled the trigger in a deal worth $10 billion. Berkshire Hathaway
Dominion provides energy to about 7 million customers in Utah, South Carolina, Ohio, Virginia, and North Carolina. After the deal, it's now primarily a pure-play utility company focused on clean energy production from wind, solar, and natural gas, as it also canceled its other, major natural gas pipeline project. For Berkshire, the deal gives it an even larger presence of the natural gas industry, as it would carry 18% of all interstate natural gas flows.
Buffett has been notably pessimistic about the economic outlook and the valuation of stocks. He cited the Fed's early and aggressive intervention as one reason that prices never reached attractive levels. In addition, his preferred measure to value the market - total market cap of the Wilshire 5000 to GDP - is approaching levels last seen in 2000, when Buffett was very bearish. One caveat is that Buffett has said that low-interest rates mean that stocks can reach and stay at high valuations for a longer period of time.
Natural Gas Price Action
While he did finally buy some assets, it's interesting that he chose to invest in natural gas which is one of the few assets in a bear market. Its bear market is largely due to the boom in the shale patch. Natural gas was a byproduct of oil production in the shale patch.
Prices were so low, and there was so much of it that it was cheaper to just burn it at the source rather than pay to transport it. However, shale production is slowing down, especially if oil prices remain under $50 per barrel.
Due to the excess of natural gas, money hasn't been flowing to the sector. Given that demand is close to highest levels, a deficit could certainly develop especially with extreme weather. Demand is slated to be strong as most utilities have fully transitioned from coal to natural gas. Additionally, countries all over the world are doing the same to reduce pollution. This is going to lead to exports of natural gas. Buffett's investment in the sector is a vote of confidence that the fundamentals are improving.
Given the lack of investment over the past decade, supply will not immediately increase if prices begin rising. This makes the sector a compelling opportunity that's also a value-play in a market where such situations are rare.
