Investors in energy companies did not have a lot of reasons to cheer their investments ever since commodity prices started to fall off a cliff. In 2014, crude oil was trading way above $100 per barrel and oil and gas companies were having the time of their lives, today is a totally different world: Upstream companies are fighting for their survival, and levered oil and natural gas companies are teetering on the brink of failure. Linn Energy, LLC (NASDAQ:LINE) and Chesapeake Energy Corp. (NYSE:CHK) are two such companies whose last hope is a debt restructuring.
But it is not only the shale companies that are standing with their backs to the wall in this low price environment. ConocoPhillips (NYSE:COP) also threw in the towel at the beginning of February, and yet again cut its operating expense forecast and capital budget. ConocoPhillips was the first major oil company that slashed its dividend, by 66%. Ouch.
Good news have indeed been rare in the oil patch lately...until this week.
Some investors, including me, regularly sift through 13F filings of investment companies and hedge funds in order to get a whiff of what the investing champions have been up to with their money. Hedge funds have to file 13F equity holding reports with the Securities and Exchange Commission every quarter, and changes in their portfolios are closely tracked by investors.
Berkshire Hathaway's 13F filing with the SEC, for instance, revealed this week that the investment company bought a new stake in pipeline operator Kinder Morgan, Inc. (NYSE:KMI), a midstream business that has gotten clobbered after it announced a large dividend cut to conserve cash last year. Buffett's investment vehicle owned 26.5 million shares of Kinder Morgan at the end of the December quarter. The total stake is now worth ~$456 million, but it is still a rather small investment position for Warren Buffett who is used to pulling off billion dollar deals.
News about Berkshire Hathaway's investment in Kinder Morgan expectedly sent shares of the pipeline company through the roof on Wednesday. KMI closed 10% higher on Wednesday after investors digested the latest round of 13F filings. Berkshire's 13F filing, however, does not reveal who bought Kinder Morgan. While Warren Buffett might have had something to do with the purchase, it could also be that one of its hedge fund managers pulled the trigger.
In any case, as usual, Berkshire Hathaway's holding of Kinder Morgan is widely interpreted as Warren Buffett's seal of approval, which is about the best news KMI shareholders could ask for.
Berkshire Hathaway's purchase of Kinder Morgan is indeed a big deal for whipped KMI investors: For one thing, Buffett is an excellent bottomfisher. His ability to buy at the right time is legendary, and has been key to his ability to earn excess returns over time. Further, Buffett is the opposite of a trader, he buys companies with strategic assets that have a wide moat, and are difficult to replace. And he buys them for the long-term. Pipeline companies perfectly into this picture.
But Buffett is not the only prominent investor that doubled down on the clobbered energy sector at the end of last year. David Tepper's hedge fund Appaloosa Management also gobbled up pipeline stocks in the fourth quarter of last year when he bought sizable stakes in Energy Transfer Partners LP (NYSE:ETP) and Kinder Morgan. Tepper now owns 9.4 million shares of KMI.
The smart money piled into the energy sector at the end of the last year. Berkshire Hathaway's and Appaloosa Management's purchases of key pipeline companies show that top-rated investment managers see great value in them, and that they think their prices have fallen too far. The smartest heads in the investment business bought KMI which shows the rest of us where excess returns could be earned moving forward.
Disclosure: I am/we are long KMI, LINE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.