Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Warren Buffett appears to have lost sight of the sunlit meadow.

Almost exactly a year ago, Berkshire Hathaway Inc. sparked a rally in the beaten-down shares of Kinder Morgan Inc. by disclosing it had snapped up roughly 26 million of them in the fourth quarter of 2015.

Buffett's Buy
Warren Buffett's appearance on the scene sparked a rally in Kinder Morgan's stock a year ago
Source: Bloomberg

One year on, Buffett is gone. In a filing detailing Berkshire's holdings made late Tuesday, Kinder Morgan's name was nowhere to be found.

On one hand, so what? The original stake was built in a quarter when Kinder Morgan's stock plummeted from a high of about $33 to less than $15, as high leverage and the energy crash forced the pipelines giant to slash its dividend. Assume Berkshire timed its purchase well and got in close to the bottom and sold all of its shares, with about 6.5 million disposed of in the third quarter of 2016 and the rest in the final quarter, at the average price for those periods. Throw in dividends, and that's an implied return of 44 percent in the space of a year. Not bad.

What is a tad disconcerting for any Kinder Morgan investor, though, is that Buffett would have chosen to just bank any such gain now.

The main reason to own Kinder Morgan is that it is working off its debts, aided by a general recovery in the pipelines and energy sectors, and will reach a point where it can raise that crushed dividend and even start buying back stock. That is the "happy sunlit meadow" Chairman Rich Kinder has been speaking of since last April.

The problem with the meadow is that getting there involves a bit of a slog. As I laid out in this analysis in October, buybacks or a meaningful increase in Kinder Morgan's dividend look more like 2018 events rather than something happening this year. The cash-flow math just doesn't get you there any quicker -- and expectations on that front continue to come down:

Ebitdaaahhh...
Ebitda estimates for Kinder Morgan continue to drop even as sentiment on energy and pipeline stocks has improved
Source: Bloomberg

As an aside, it's worth noting Berkshire has been adding to its airline holdings -- a sector that typically prefers lower rather than higher energy prices.

But, I hear you cry, waiting a year or two means nothing to an investor like Buffett. That's exactly why his exit is unnerving.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net