Lest anyone think that my RM column is not omnipotent, the column I wrote on June 25th chastising Warren Buffett and Berkshire Hathaway (BRK.B) for their inaction on the deal front produced nearly instant results. Berkshire and Dominion Energy (D) announced a transaction Sunday that will see Berkshire acquire the bulk of Dominion's natural gas transmission/pipelines business and 25% of the Cove Point, MD LNG facility, in which Dominion will retain a 50% non-operating interest.
With pundits bashing Warren's acumen (note that my RM column did not do that, I just wrote that I wanted to see Berkshire do something with its massive cash pile) and accusing him of overly conservative behavior, he is involved in one of the most ill-advised, pointless corporate transactions I have seen in 30 years. Ill-advised and pointless for Dominion, that is.
As Gordon Gekko told us in Wall Street, it's a zero-sum game. What's bad for Dominion must be good for Berkshire, and I believe that is the case here. Warren will turn 90 on August 30th and his right-hand Charlie Munger turned 96 on New Year's Day. Those O.G.'s know a thing or two about market timing and asset values.
It is very difficult to ascertain a market value of the assets since Dominion's disclosure is murky and Berkshire never discloses more than the bare minimum. Berkshire is getting 7,700 miles of natgas transmission and 900 billion cubic feet of natgas storage for only $4 billion in cash. BRK is also assuming $5.7 billion in debt associated with the Dominion assets, but that is a mere rounding error compared with Berkshire's $129 billion cash pile.
For Dominion shareholders this deal is like a Mike Tyson combination of punches to the wallet. Firstly, Dominion's earnings power is severely hampered. Management's guidance for 2020 earnings now sits at a midpoint of $3.50 for 2020 versus the prior guidance of $4.43. Yes, they just gave away 22% of D's earning power. Where that diminution is most felt is on the dividend payout, which will shrink by a third from 94 cents per quarter to an estimated $0.625 per quarter. This a utility stock, and dividend payouts aren't "a thing", they are the thing.
What will Dominion do with this $4 billion windfall? Firstly, they will pay $1 billion in capital gains taxes, which makes me think they need better lawyers, and then after a $250 million pension contribution, they will use ~$3 billion to...wait for it... buy back stock.
It will be easy for Dominion management to buy back shares because the stock market is disgorging them at alarming rates. D shares have fallen 12% this week against the backdrop of a rising market for both stock and bonds; the latter should make utility stocks marginally more attractive.
This is just a bad deal on so many levels for Dominion. They are selling natural gas assets as natural gas prices hit generational lows following the Covid-19 lockdowns, although they've have recovered somewhat to $1.80/mmcf in recent weeks. D CEO Tom Farrell and Co. seem to be attempting to turn Dominion into some "woke" poster child with a focus on renewables and everybody's favorite buzzword "ESG" mentioned prominently in the company's post-deal presentation.
It just makes no sense. Dominion still operates three nuclear plants, 15 natural gas plants, four plants powered by coal, and four plants powered by oil, which is possibly the least efficient, most-polluting generation fuel on earth (wood is actually worse) and is of course, composed of carbon and hydrogen.
Who is Tom Farrell trying to kid? This lipstick-on-a-pig deal at the bottom of the natgas market is not just dumb, it is Jeff Immelt-dumb. Buffett fleeced Immelt during the 2008 financial crisis with Berkshire's purchase of $3 billion worth of GE preferred shares which included a 10% coupon, 10% redemption premium (the shares were redeemed three years later) and $3 billion in GE warrants.
Apparently Tom Farrell didn't realize that when Warren calls during a crisis, you should hang up the phone immediately. Big win for the Oracle, nice pickup for Berkshire, and Dominion -- even after its plunge this week -- still looks like a big short.
