As I mentioned at the start of the week, one of the bad news bullet points found in this year's Berkshire Hathaway letter to shareholders related directly the battered fuel source. As the Oracle of Omaha pointed out, his company has already been forced to write down a substantial portion of his $2 billion bond investment in Energy Future Holdings, a Texas-based utility firm, as natural gas prices have plummeted. Calling it a "big mistake," Buffett notes that if the fuel's prices continue to crumble, the carrying value of the Berkshire bet could be wiped out entirely. At the same time that natural gas is causing the investor's Energy Future Holdings investment to sour, growing activity in this corner of the energy sector is acting as a boon for another notable component of the Berkshire Hathaway Investment Empire, the Burlington Northern Santa Fe Railroad.
When Buffett announced his decision to spend more $26 billion to purchase the remaining 77% of BNSF railroad in late 2009, some fans who had monitored the investor's buying habits over the decades were left scratching their heads. Whereas Buffett had historically shown preference for undervalued companies that had a great deal of upside potential, BNSF's size ensured that any upside action would likely be slow and steady. Rather than looking for a short-term pop, however, the Nebraska native stated that the railroad investment was considered an "all in bet" on the United States that would ultimately benefit Berkshire Hathaway for decades to come. Living up to Buffett's hopes, BNSF has managed to take advantage of the nation's economic recovery. In his shareholder letter, Buffett likens U.S. rail to an economic circulatory system. Being responsible for 37% of the total inter-city rail freight, BNSF is highlighted as the largest artery. Burlington Northern's reach across the U.S. has helped it gain attractive positioning for specific industries like energy. In the past, I have highlighted the railroad's heavy involvement in the coal industry. However, as Bloomberg points out this week, the railroad also has a staggering lead over many of its competitors when it comes to taking advantage of growing activity in the Bakken shale formation.
A potential settlement between the railroad and activist investor Paul Hilal could emerge shortly that would bring in Hunter Harrison, who is well-regarded for his turnaround of Canadian Pacific Railway.