Thursday, November 12, 2009

Buffett Betting on Coal?

Most of us would agree that Warren Buffett's stature as an investor reaches level of Godlike stature in which many people call him the Oracle of Omaha. His company, Berkshire Hathaway Inc (BRKa.N) (BRKb.N), is paying $26 billion to buy out railroad Burlington Northern Santa Fe (BNI.N), the company's biggest ever investment. Burlington Northern Santa Fe is a leading transporter of coal. According to MarketWatch, this company's coal shipments accounted for roughly 25 percent of the firm's total revenue in Q3 2009. In fact, Burlington Northern had shipped 297 million tons of coal last year, which amounts to roughly 10% of the energy supply used to meet country's electrical needs. Its coal shipments are down 6% this year, however, which many believe is due to recession.

It seems odd that Berkshire and Buffett would invest this amount of money in a company that relies on a good portion of its revenue from shipping coal when there is a pending carbon emissions bill in Congress and a push to replace coal with other alternative clean energy solutions, such as solar and wind. Perhaps Buffett believes that coal will still be a significant part of the country's future energy policy or that the pending bill in Congress will not have as great of an impact in reducing coal usage. In addition, investing in a railroad is not a bad investment considering that trains use a significantly less amount of fuel than other forms of transportation.

In fact, Buffet is quoted as saying the following:
BNSF last year ... moved a ton of goods 470 miles on one gallon of diesel. It releases far fewer pollutants into the atmosphere. It saves enormously on energy consumption and ... it diminishes highway congestion. Rails last year moved 40 percent, more than 40 percent, over the country. They moved more than all those trucks, just the four big railroads. It's a very effective way of moving goods. I basically believe this country will prosper and you'll have more people moving more goods 10 and 20 and 30 years from now, and the rails should benefit.

It should be noted that Berkshire has invested in the energy company, MidAmerican Energy, which has received approval in Iowa to build wind farms with a total 1,001 megawatts of generating capacity. Like any shrewd investor, you need to hedge your bets. I am leaning toward Congress and public pressure to pass a carbon emissions bill that will restrict coal usage; however, betting against Buffett is never a good strategy even if you will be betting against the future survival of the planet.

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