The Berkshire Beat: July 14, 2023
All of the latest Berkshire Hathaway news and my must-reads of the week!
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The latest news and notes out of Omaha…
On Monday, Berkshire Hathaway Energy agreed to purchase Dominion Energy’s 50% stake in the Cove Point LNG pipeline and storage terminal in Maryland for $3.3 billion. This transaction boosts BHE’s ownership of the facility up to 75%, with Brookfield Infrastructure Partners controlling the other 25%. Cove Point is one of only seven plants in the United States that can export LNG — and, coincidentally, one of its biggest customers is Sumitomo (sogo shosha).
“We are proud of our operations at Cove Point and are excited for this opportunity to increase our ownership in these world-class facilities,” BHE’s Paul Ruppert said in a press release. “The Cove Point team will continue to focus on providing safe, affordable, and reliable service to its valued customers.”
In April, vice chairman Greg Abel explained that BHE initially got involved with Cove Point back in 2020 because of his “strong relationship” with Dominion’s former CEO, the late Tom Farrell. I think it’s safe to say that Abel’s fingerprints are all over this deal, too.
Bill Stone, CIO of Glenview Trust, spoke to CNBC about BHE’s interest in Cove Point. “It builds on their long-term theme of energy resources becoming more valuable and ownership of one of only a few U.S. LNG exporters.”
“Buffett has liked pipelines for a long time, given their toll bridge-type revenues — rather than pure commodity exposure — and this is likely similar,” Stone continued. “Natural gas prices are down a ton, but I think most of these exporters work on long-term ‘take or pay’ contracts.”
On Tuesday, sanity prevailed — at least for the time being — inside a San Francisco courtroom as the FTC’s motion for an injunction against Microsoft’s $68.7 billion acquisition of Activision Blizzard was denied. That’s good news for Berkshire’s merger arbitrage play on ATVI 0.00%↑. But, I must caution, this is not over yet. The FTC has filed an appeal to the 9th Circle Court of Appeals. Stay tuned.
Judge Jacqueline Scott Corley minced no words in her decision: “The FTC has not shown a likelihood it will prevail on its claim … The record evidence points to more consumer access to Call of Duty and other Activision content.” She also added, “Perhaps [this deal is] bad for Sony. But [it’s] good for Call of Duty gamers and future gamers.”
Good news from across the pond, too: Microsoft and the U.K.’s Competition & Markets Authority have agreed to pause all litigation while MSFT 0.00%↑ readies a new proposal (likely with some small modifications or concessions) that could win regulatory approval. It feels like we’re in the endgame now.
The annual Allen & Co. conference — known as “summer camp for billionaires” — kicked off on Wednesday in Sun Valley. But, in a surprising twist, Warren Buffett isn’t the only notable member of Berkshire in attendance. Observer (the media outlet, not an observer) spotted investment manager Ted Weschler amongst the crowd.
Today is a big dividend day for Berkshire — with approximately $223.8 million pouring into the company’s coffers via Occidental Petroleum. That includes $39.9 million from Berkshire’s common stock position in OXY 0.00%↑ and $183.9 million from the preferred shares acquired in 2019 as part of the Anadarko deal.
This quarterly dividend payment does not reflect the 2.1 million shares purchased between June 26-28. Those transactions occurred weeks after this dividend’s date of record.
In the Spotlight: Berkshire Hathaway Director Chris Davis
Many thanks to The Rational Walk for unearthing this gem!
Back in May, Berkshire Hathaway director Chris Davis sat down with Barron’s to discuss his continuing appreciation for bank stocks — even though they’ve been a drag on his fund’s performance over the last few years.
It’s not a long interview — and the whole thing is certainly worth a read — but I’ve pulled out the parts of particular interest to Berkshire fans.
Including a barn-burner of a response about protecting the company’s unique culture.
On Capital One Financial:
Capital One has been a fintech company since the start. It uses data science to market financial services. It is still run by its founder, Richard Fairbank. The bank pays a high rate on its deposit base. It is a big issuer of credit cards — primarily to working people, not big spenders. The best analogy is Progressive, a data-science company disguised as an insurer. Progressive realized early on that there is no bad risk; there is only bad pricing.
Capital One has matched its loans to its deposits. At around $100 a share, it is trading right around tangible book value, for a business that has had a low- to mid-teens return on equity for 35 years.
Berkshire bought 9.9 million shares of COF 0.00%↑ in Q1 2023.
On his decision to join the no-frills Berkshire board:
It is a duty. Berkshire has been run with enormous transparency, integrity, a long-term orientation, and a culture of stewardship. It is run by the greatest investor in history. Who would say no to that opportunity?
On protecting Berkshire’s culture in the post-Buffett era:
Every activist and investment banker will argue that, in a world without Warren and Charlie, Berkshire’s unorthodox structure shouldn’t persist. I think Berkshire is worth defending. Warren has assembled a collection of long-lived assets that will produce cash flow for decades to come.
If we had a Latin motto in my family, it would be the Latin for “work before play”. Eat your vegetables, then you get dessert. Being on the board of Berkshire is a bit like getting dessert first — the chance to be with Warren and Charlie. The vegetables will come when they aren’t there, when the job of the board will be to protect this precious culture.
This is music to my ears.
Chris Davis hasn’t been a Berkshire director for very long, but he already sounds fully committed to the board’s mission and prepared to take on anyone — or any institution — that threatens to tear down what Warren and Charlie built.
More Must-Reads
Other awesome things that I read this week…
The Evolution of a Value Investor The Science of Hitting
“Instead of thinking about whether various approaches are right or wrong, I now tend to think about them in terms of trade-offs. Consider the distinction between growth and value (as both are traditionally defined). My good friend Bill Brewster has articulated a useful way of thinking about the puts and takes of either approach: value investors understand the role of price / low valuations in mitigating the left tail risks, while growth investors understand the right tail can be longer than the value investors appreciate (or, more appropriately, may be longer than they’re willing to continue staking their capital against).”
Taking the Temperature (Howard Marks)
“Watch for moments when most people are so optimistic that they think things can only get better, an expression that usually serves to justify the dangerous view that ‘there’s no price too high’. Likewise, recognize when people are so depressed that they conclude things can only get worse, as this often means they think a sale at any price is a good sale. When the herd’s thinking is either Pollyanna-ish or apocalyptic, the odds increase that the current price level and direction are unsustainable.”
The Use of Letters The Rational Walk
“Charlie Munger jokes about the ‘cultists’ who come to hear him speak, but the fact that the vast majority of his followers are on a real quest for wisdom is no joke at all. There are people who have seen the light when it comes to learning from the past, but I suspect the percentage of people who fall into this category is in the low- to mid-single digits at best. This gives those of us who take history seriously a major competitive advantage.”
Filtering the Idea Funnel Frederik Gieschen
“Say you are searching for great ideas, be it investments, ventures, or knowledge. On the one hand, you want to be exposed to a large sample of ideas from which you can select the most valuable ones. You want a wide funnel. On the other hand, your time for analysis is limited. You want to spend as little time as possible to filter out ideas that are either bad or just not a fit for you. If you’re trapped in analysis paralysis, you don’t get to execute and finish.”
Howard Marks is a must read if you don't already keep up with him.
Solid list of must-reads!