Warren Buffett Owns the Largest Natural Gas Pipeline System in the U.S. Want to Invest Like Him? Buy This High-Yield Pipeline Stock.
Warren Buffett’s Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) is a conglomerate that directly owns a large number of companies. One, Northern Natural, is a midstream giant with a particular focus on natural gas. If you want to invest like Buffett, you can own a midstream giant focused on natural gas, too, by buying high-yielding Enterprise Products Partners (NYSE: EPD). Here’s what you need to know.
Buffett likes to collect cash
The midstream business is very boring, but that’s probably what makes it so attractive to Buffett. Northern Natural owns vital infrastructure assets and charges customers tolls for using them. That creates a reliable stream of cash flows that Berkshire Hathaway can use however it likes. Right now, that likely means building up the company’s $33.7 billion cash hoard and $130 billion in short-term investments as it searches for new acquisition candidates.
Buffett is picky with his acquisitions, preferring to wait until he finds a good company at a good price. Northern Natural obviously made the cut, with 14,200 miles of natural gas pipelines in its system. According to Berkshire Hathaway, Northern Natural owns the largest interstate natural gas pipeline system in the United States. In addition to the massive pipeline system, it also operates natural gas storage assets and liquefied natural gas storage peaking units.
None of that is at all surprising. It’s pretty much what you would expect from a midstream energy company. These are largely toll-taker businesses that generate reliable cash flows from large and expensive-to-build energy infrastructure. And many of the biggest publicly traded players in the space offer handsome dividends. One that stands out is Enterprise Products Partners.
Enterprise is an industry giant
Enterprise is one of the largest energy infrastructure players in North America, sporting a $60-billion-plus market cap. It has an investment-grade balance sheet and has increased its distribution for 25 consecutive years. Distributable cash flow covered the distribution by a very impressive 1.7 times in 2023. And — perhaps the best part for income-focused investors — the yield is a hefty 6.9%.
Enterprise Products Partners’ portfolio is a bit broader than that of Northern Natural, spanning across pipelines, storage, processing, and transportation, including facilities that export energy around the world. It also handles more than just natural gas, though it is a very big player in the natural gas arena. To give a sense of Enterprise’s scale, in 2023 it handled 34% of all U.S. waterborne natural gas liquid exports, 20% of crude waterborne exports, and 13% of waterborne petrochemical and refined product exports. In this way, it is actually more diversified than Northern Natural, which should probably be viewed as a positive by conservative investors.
To be fair, Enterprise’s distribution will likely make up the lion’s share of an investor’s total return. If you are looking to use that income to supplement your Social Security in retirement, though, this will probably not be a problem for you. That said, slow and steady distribution growth is likely, because Enterprise has the financial strength and scale to be an industry consolidator and it has around $6.8 billion worth of capital investments planned through 2026. That, of course, comes on top of regular price increases that are generally included in its contracts.
While Enterprise won’t excite you, if history is any guide, it should provide you with years of reliable income. The one fly in the ointment is that Enterprise is a master limited partnership (MLP), which can create some tax complications. MLPs don’t play well with tax-advantaged retirement accounts and you will have to deal with a K-1 form come tax time. But those are likely to be small hindrances when you weigh them against the hefty income stream you’ll be adding to your portfolio.
A Buffett-like investment of your own
You could obviously own a piece of the Northern Natural if you bought Berkshire Hathaway. But you won’t directly benefit from the cash flows it generates because Berkshire Hathaway doesn’t pay a dividend. If you buy Enterprise Products Partners, one of the largest and most reliable midstream players in North America, you can directly collect its hefty distributions and use them as you see fit. Dividend investors will probably find that to be a very attractive alternative.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends Enterprise Products Partners. The Motley Fool has a disclosure policy.
Warren Buffett Owns the Largest Natural Gas Pipeline System in the U.S. Want to Invest Like Him? Buy This High-Yield Pipeline Stock. was originally published by The Motley Fool
