A filing with the SEC Tuesday evening reveals that Berkshire Hathaway Inc. (BRK-A, BRK-B) has taken on a substantial stake in the ailing oil pipeline company Kinder Morgan Inc. (KMI), purchasing 26.5 million shares in the fourth quarter.
Berkshire's chairman and CEO Warren Buffett is renowned for his investing wisdom, and particularly his eye for value in companies that transitory market moves have beaten down. Kinder Morgan is up nearly 11% following the revelation that Buffett has put his faith in it. (See also, Warren Buffett: How He Does It.)
Kinder Morgan has declined from over $44 per share in April 2014 to $15.62 at close on Tuesday, not including dividends. Like (most of) the rest of the oil patch, it's been a victim of the relentless decline in crude oil prices.
Buffett has also recently increased his stake in Phillips 66 (PSX), an oil refinery. A company filing on February 3 revealed that Berkshire had bought an additional 12 million shares, bringing the total to 73.5 million, or around 14% of the company. Refiners are an exception to the general mayhem in oil company earnings, since they buy the crude oil they refine. Phillips' annual profits actually rose 28% to just under $4.8 billion between 2013 and 2014.
While Phillips 66 is relatively insulated from the low oil price, Kinder Morgan is less so. The choice to buy the pipeline company is a vote of confidence in a sector dominated by fear for going on two years. Crude oil is worth about 30% of what it was in mid-2014, as producers have pumped record amounts in order to retain market share. (See also, Oil Production Freeze Talks In Doha Lead To Tehran.)
Such a situation arguably creates the perfect chance to implement Buffett's value investing philosophy. As he would put it, "whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." The price rout in crude oil may not be entirely due to either of the two "super-contagious diseases" Buffett considers to be endemic to Wall Street, fear and greed. The supply-demand imbalance is real, but if it does correct itself, the proverbial tide will go out. To quote just one more Buffett maxim, "simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
The Bottom Line
It's hard to find an energy bull these days, so the Oracle of Omaha's decision to bet on Kinder Morgan is encouraging for beaten-down oil investors. On the other hand, Buffett has made no secret of the fact that he invests in companies, not whole sectors. Without asking him, it's fair to wager that his bet on Kinder Morgan is a bet on Kinder Morgan, full stop – although that does imply at least some long-term optimism when it comes to the sticky stuff.