BUFFET'S BURLINGTON BID A BET ON COAL'S CONTINUED ROLE - WSJ/11-3-09/4:58 PM
WASHINGTON (Dow Jones)--The Oracle of Omaha sees a future in coal--especially from the Western U.S.--despite the political forces opposing the fuel.
Billionaire investor Warren Buffett on Tuesday billed his plans to buy the 77% of railroad operator Burlington Northern Santa Fe Corp. (BNI) he doesn't already own as an "all-in wager on the future of the United States." But as much as anything, the offer amounts to a bet on the near-term use of a fuel with a mixed reputation in an era of concern about global warming: coal.
"This is a $34 billion dollar bet that coal will remain the centerpiece of American energy policy in the future," Frank O'Donnell, the president of environmental group Clean Air Watch, wrote in a note to clients. "Buffett clearly believes that coal use will remain strong."
Burlington Northern carries coal that generates about 10% of all U.S. electricity. Last year, coal shipments accounted for about 23% of the Fort Worth, Texas, company's freight revenue. The majority of that---some 90%--came from coal produced in the Powder River Basin, the coal-rich area in Wyoming and Montana. Big mining companies shipping coal through Burlington Northern include Arch Coal Inc. (ACI).
The coal business isn't very popular right now in the nation's capital, where much of official Washington is massing forces against the fuel, which accounts for half of all U.S. electricity. Global warming activist and former U.S. Vice President Al Gore has said that the U.S. should find new jobs for coal workers because the resource is too damaging to keep using. The Obama administration has been clamping down on certain kinds of coal mining, citing the magnitude of damage to water and streams.
But to those who follow the power industry--and Buffett, whose Berkshire Hathaway Inc. (BRKA, BRKB) also owns utility MidAmerican Energy Co., is among them--there is another business reality: Coal isn't going away anytime soon. Even if the U.S. puts a cap on the carbon-dioxide spewed out by major sources such as coal-fired power plants, large amounts of coal will still be needed. But it also is likely to mean rising coal prices, as companies are forced to pay for pollution generated from coal.
"As energy prices go up, it becomes more and more important to ship by rail--that's a factor," Buffett said in an interview with The Wall Street Journal. "It's a factor in why the country has a huge interest in fostering rail." He said that rails "carry a lot of coal, but 25 years from now they won't be carrying as much."
With a smaller market to serve, U.S. analysts say that the big winner will be the producers of low-sulfur coal from the Powder River Basin.
Built into the purchase is an assumption that "over a longer period of time, Powder River Basin coal from Wyoming takes some share way from eastern coal," said Jeremy Sussman, an analyst at Brean Murray Carret & Co. Inc.
Because coal in the Eastern U.S. has been mined for the longest time, reserves are depleting at a faster rate than in other regions, so what is left is harder to get at, and thus more expensive, Sussman said. He also said that global demand means that coal reserves in Appalachia will be snapped up overseas. That leaves Powder River Basin coal as a big supplier in the U.S.
Buffett isn't the first one to make a bet on coal from the region. Earlier this year, Alpha Natural Resources Inc. (ANR) completed its purchase of Foundation Coal Holdings Inc., whose two main mines, Belle Ayr and Eagle Butte, are located in Wyoming. The proposed Burlington purchase makes a bet on the same two facilities: Burlington Northern is the only railroad to ship from both mining complexes. Some of the coal from Belle Ayr is shipped to MidAmerican, said an Alpha spokesman.
"I guess it's a good time to be making bets," said Ted Pile, the Alpha spokesman.
-By Siobhan Hughes and Mark Peters, Dow Jones Newswires; 202-862-6654; siobhan.hughes@dowjones.com
(Scott Patterson of The Wall Street Journal contributed to this report.)
Billionaire investor Warren Buffett on Tuesday billed his plans to buy the 77% of railroad operator Burlington Northern Santa Fe Corp. (BNI) he doesn't already own as an "all-in wager on the future of the United States." But as much as anything, the offer amounts to a bet on the near-term use of a fuel with a mixed reputation in an era of concern about global warming: coal.
"This is a $34 billion dollar bet that coal will remain the centerpiece of American energy policy in the future," Frank O'Donnell, the president of environmental group Clean Air Watch, wrote in a note to clients. "Buffett clearly believes that coal use will remain strong."
Burlington Northern carries coal that generates about 10% of all U.S. electricity. Last year, coal shipments accounted for about 23% of the Fort Worth, Texas, company's freight revenue. The majority of that---some 90%--came from coal produced in the Powder River Basin, the coal-rich area in Wyoming and Montana. Big mining companies shipping coal through Burlington Northern include Arch Coal Inc. (ACI).
The coal business isn't very popular right now in the nation's capital, where much of official Washington is massing forces against the fuel, which accounts for half of all U.S. electricity. Global warming activist and former U.S. Vice President Al Gore has said that the U.S. should find new jobs for coal workers because the resource is too damaging to keep using. The Obama administration has been clamping down on certain kinds of coal mining, citing the magnitude of damage to water and streams.
But to those who follow the power industry--and Buffett, whose Berkshire Hathaway Inc. (BRKA, BRKB) also owns utility MidAmerican Energy Co., is among them--there is another business reality: Coal isn't going away anytime soon. Even if the U.S. puts a cap on the carbon-dioxide spewed out by major sources such as coal-fired power plants, large amounts of coal will still be needed. But it also is likely to mean rising coal prices, as companies are forced to pay for pollution generated from coal.
"As energy prices go up, it becomes more and more important to ship by rail--that's a factor," Buffett said in an interview with The Wall Street Journal. "It's a factor in why the country has a huge interest in fostering rail." He said that rails "carry a lot of coal, but 25 years from now they won't be carrying as much."
With a smaller market to serve, U.S. analysts say that the big winner will be the producers of low-sulfur coal from the Powder River Basin.
Built into the purchase is an assumption that "over a longer period of time, Powder River Basin coal from Wyoming takes some share way from eastern coal," said Jeremy Sussman, an analyst at Brean Murray Carret & Co. Inc.
Because coal in the Eastern U.S. has been mined for the longest time, reserves are depleting at a faster rate than in other regions, so what is left is harder to get at, and thus more expensive, Sussman said. He also said that global demand means that coal reserves in Appalachia will be snapped up overseas. That leaves Powder River Basin coal as a big supplier in the U.S.
Buffett isn't the first one to make a bet on coal from the region. Earlier this year, Alpha Natural Resources Inc. (ANR) completed its purchase of Foundation Coal Holdings Inc., whose two main mines, Belle Ayr and Eagle Butte, are located in Wyoming. The proposed Burlington purchase makes a bet on the same two facilities: Burlington Northern is the only railroad to ship from both mining complexes. Some of the coal from Belle Ayr is shipped to MidAmerican, said an Alpha spokesman.
"I guess it's a good time to be making bets," said Ted Pile, the Alpha spokesman.
-By Siobhan Hughes and Mark Peters, Dow Jones Newswires; 202-862-6654; siobhan.hughes@dowjones.com
(Scott Patterson of The Wall Street Journal contributed to this report.)
Views: 30
Replies to This Discussion
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Permalink Reply by jffree1 on
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Maybe he thinks the railroads are going to be able to compete with trucking companies for shipping business (of any number of commodities other than coal)? I don't think it's so much a bet on coal as it is a bet on America and our future. And it had to be a really good deal or he wouldn't have done it, right?
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Permalink Reply by ken hatcher on -
Warren was looking to move some money out of treasuries & bond's , the dollar is being destroyed. So he bought himself a railroad. Much of the coal will go to china.
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Permalink Reply by sesport on
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I'm agreeing with you, he isn't who he is today for NOT knowing what he does. I had the television on after hours at work and it caught my ear. Something to keep an eye on anyway. choo-choo :0)
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Permalink Reply by Skip Peel - Mineral Consultant on
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I agree that the Oracle of Omaha is bullish on the U S economy going forward. And that he has a distinguished track record regarding Berkshire Hathaway's investment history. However, considering that 23% of Burlington Northern's revenue is derived from coal shipments, I think Mr. Buffet's view of the politics concerning national energy policy is that coal will be protected and remain in wide spread use. In essence he is betting that cap and trade will not pass or will be structured in such a way as to protect the coal industry.
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Permalink Reply by intrepid on
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Also note that Berkshire B split. What do you think that means? Class A hasn't been doing that well lately.
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Permalink Reply by ALongview on
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I think there might be a second motivation here as well.....in the value of the real estate. Railroads are some of the largest landowners in the country and the future value of "real" vs. "paper" assets might have had something to do with his evaluation of the companies value. I am not saying that the coal transportation is not a major factor, I am just thinking of the add-ons to the value of a railroad going forward in an environment where you may not want hold treasuries or cash. Real estate has always fared better in inflationary environments than treasuries or cash and he just transfered 26B out of paper and into land and rail.
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Permalink Reply by Skip Peel - Mineral Consultant on
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Neither the Class A nor Class B has changed much in value. The Class B common stock has been trading around $3300/share. How many small investors might be tempted to acquire some shares at the 50-to-1split price of ~$66/share? Who knows? I just think Warren is not only savvy in his investments but in his opinion of national politics. And IMO, there is no way he makes this investment without feeling sure that the coal industry will not be drastically impacted by energy regulation in the Congress.
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Permalink Reply by ken hatcher on
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One thing for sure, it's gonna shake out. Even with a 2% growth in GDP he could hang in there and remember going forward a lot of coal will go overseas.
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