Energy Business

Why Warren Buffett Bought Kinder Morgan Over Other Infrastructure and MLPs

Jon C. Ogg

Warren Buffett is considered one of the greatest investors of all time. Becoming the world’s richest man can do that. So, how does the investing class react when they see that Buffett is still making bets in the oil and gas sector at a time when the sector has cratered?

In the latest Buffett holdings, as of the end of 2015, it was more than just a little bit of a surprise to see that Berkshire Hathaway Inc. (NYSE: BRK-A) now held a large stake in Kinder Morgan Inc. (NYSE: KMI). It was already known that Buffett has been accumulating shares of Phillips 66 (NYSE: PSX).

One thing Buffett is thinking about here is very evident. He says to be fearful when others are greedy and to get greedy when others are fearful. Buffett’s long-term view allows him to not care about the next three or six months. He can always buy more shares at lower prices if his thesis for owning a stock hasn’t changed after the stock drops.

In the case of Kinder Morgan, Buffett is simply adding on top of his Phillips 66 bet for the infrastructure side of the oil and gas business. That means an implied low exposure to actual oil prices, while still getting exposure to the energy business. It also matters for master limited partnerships (MLPs), in a matter of speaking.


24/7 Wall St. could not help wonder why Buffett chose Kinder Morgan over the likes of Williams Companies Inc. (NYSE: WMB) and Energy Transfer Equity L.P. (NYSE: ETE). Or what about the incredibly well run Enterprise Products Partners L.P. (NYSE: EPD)? Enterprise Products Partners does have a $45 billion market cap.

Size still matters, but so do other considerations. Kinder Morgan’s market cap is now about $38 billion. That makes it larger than a combined Williams and Energy Transfer Equity, with their market caps being $11.4 billion and $6.7 billion, respectively.

What may be driving the cart here is not the deal-making that Richard Kinder has continued with despite the drop in energy prices. Buffett likely doesn’t even care that Kinder Morgan’s dividend has been cut handily. What may help here is that Kinder Morgan is no longer an MLP. Enterprise is an MLP. And the Energy Transfer Equity and Williams merger is rather complex, and there are questions now about whether that deal actually can close.