How to Invest Like Warren Buffett in the U.S. Energy Revolution

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In our Aug. 11 Private Briefing report "What Does This 'Mysterious Signal' Tell Us About CB&I?" we said we suspected that super-investor Warren Buffett would use the sell-off in Chicago Bridge & Iron NV (NYSE: CBI) to boost his stake in the Netherlands-based infrastructure specialist.

That's exactly what happened.

Here's why and here's how to profit by following the same techniques...

The Contrarian Move We Called

Shares of CB&I surged nearly 4% in pre-market action last Friday after U.S. Securities and Exchange Commission (SEC) filings showed that the "Oracle of Omaha" had boosted his holdings to 9.89%. The 1.15 million additional shares he purchased increased his total holding to about 10.7 million shares. (For those of you doing the math, that's up from 9.55 million shares in March. And Buffett also raised his stake last year.)

The purchases came at a point when the stock was down about 30% year to date. But it underscores the fact that Buffett is a long-term investor who focuses on the long-term business prospects - and actually gets excited when a company he likes "goes on sale."

(If you really want to see this contrarian investing sentiment in action, take the time to read one of my favorite business books: Buffett: The Making of an American Capitalist, by Roger Lowenstein. While most investors panic when a company's share price falls, if the underlying business is one that Buffett really loves, he gets positively giddy and views the sell-off as a chance to "load up.")

And CB&I is clearly a company that Buffett likes a lot. So it's no surprise that he keeps adding to his stake.

You see, Chicago Bridge specializes in civil engineering mainstays such as bridges, roads, reservoirs, ports, and storage tanks. CB&I also designs and builds oil pipelines, nuclear power plants, and liquefied natural gas (LNG) facilities.

Most of the time, nothing is more predictable than the steady earnings and revenue growth of construction and engineering companies in the energy sector. But shares of Chicago Bridge have been punished over integration concerns related to its $3 billion acquisition of the Shaw Group last year. The stock is down about 25% from where we first recommended it.

Buffett likes this company for two reasons.

First, energy infrastructure is a very good business - especially for the long run. And second, energy investments have become a strategic component of Buffett's overall investment strategy.

America's New "Declaration of Independence" Is Producing Huge Gains

One of the prevailing themes here at Money Map Press is that North America is in the earliest phases of a true energy revolution - one that's going to grant the United States a new "independence" from foreign oil imports.

You've cashed in big on that theme, including peak gains of 255% on Oiltanking Partners LP (NYSE: OILT), 251% on EnLink Midstream LLC (NYSE: ENLC) (formerly Crosstex Energy), 202% on American Railcar Industries Inc. (Nasdaq: ARII), 159% on Cheniere Energy Inc. (NYSE: LNG), and 123% on Callon Petroleum Co. (NYSE: CPE).

Buffett obviously sees this potential himself, which is why he's been "collecting" energy assets for several years now. Indeed, in our May 12 report "We Know Where Warren Buffett Will Invest Next," we detailed how Buffett was creating a formal energy unit inside Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B).

In a move that acknowledges the "brand power" that Berkshire has amassed in the investing arena, Buffett's outfit changed the name of its energy arm from MidAmerican Energy to Berkshire Hathaway Energy.

Like Dr. Kent Moors, our energy expert here at Money Map Press, Buffett & Co. has recognized the big profit opportunities available in the "midstream" (delivery) portion of the oil-and-gas market. So you can bet that he and Berkshire Hathaway Energy and will be making additional moves to snap up properties in liquefied natural gas, pipelines, and electricity production.

One of Buffett's existing investments is CB&I.

The Berkshire "Brand" Method of Building Value

In May 2013, Berkshire Hathaway's MidAmerican Energy utility said it was spending $5.6 billion to buy NV Energy Inc., a Nevada-based electric and natural gas firm that serves customers through Nevada Power Co. and Sierra Pacific Power Co.

Buffett's folks saw a big opportunity to jump-start NV Energy's growth. MidAmerican has been an enthusiastic investor in renewable energy products, and experts said that experience would help NV Energy create such products in its home state - a sound strategy given that Nevada has a hefty presence in solar, geothermal, and wind resources.

This deal also plays into a broader industry trend. Utilities are being forced to consolidate because of rising costs, aging infrastructure, and tough regulations aimed at driving cleaner energy. Utilities also rely heavily on debt to function. And with its huge financial base, the thinking was that Berkshire would have the muscle to lower borrowing costs even as it engineered the kinds of deals needed to add "scale" and new growth-generating services.

Since making the NV Energy deal, Berkshire has pulled off a couple of smaller acquisitions. In May, it announced the subsidiary name change to Berkshire Hathaway Energy.

The changed name "more accurately reflects our growing, diversified mix of businesses and the customers they serve," Greg Abel, the energy unit CEO who has earned high marks for his stewardship, said back then. "Our new name reflects the benefits we gain from Berkshire Hathaway's ownership, particularly our ability to reinvest in our businesses and take a long-term view of our customers' needs, which have helped us become a leader in the global energy industry."

Berkshire Hathaway Energy has amassed a nice set of properties, including:

  • MidAmerican Energy Co.
  • MidAmerican Renewables LLC
  • PacifiCorp (consisting of PacifiCorp Energy, Pacific Power, and Rocky Mountain Power)
  • Northern Powergrid Holdings Co. (formerly CE Electric UK)
  • Integrated Utility Services UK
  • CalEnergy Generation
  • Kern River Gas Transmission Co.
  • Kern River Pipeline
  • Northern Natural Gas Co.
  • HomeServices of America, Inc.
  • BYD Co. (10% stake)
  • NV Energy
  • Metalogic Inspections Services
  • Intelligent Energy Solutions
  • Chicago Bridge & Iron (10% stake)

Berkshire Hathaway also owns Burlington Northern Santa Fe Corp., the parent of BNSF Railway (formerly the Burlington Northern and Santa Fe Railway). The railroad is a major transporter of crude oil (about 10% of oil produced in the lower 48 states) and a key logistics operator.

So you can see why Buffett - already one of CB&I's largest investors - has snagged additional shares in the company.

Berkshire started picking up shares in 2013 when they were last in the $60 range. "Buffett watchers" had been predicting additional purchases. And some folks have even predicted he might launch a bid for the entire company.

We, too, expected Berkshire to add to its stake.

And that's just what happened.

The big concern with CB&I is that the company has been generating negative free cash flow (FCF) over the past couple quarters - with a peak of $260 million in the second three months of the year. But management says it will turn that negative into a positive in the last half of this year. And it does have a massive backlog of more than $30 billion.

Analysts right now have a $92 target price on Chicago Bridge - with a high-water estimate of $100. That represents a projected gain of as much as 68% from current levels.

Because a lot of readers have said they like the stock - and that they want to stick with it - we'll be sure to keep you posted on new developments.

About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish… and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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