Buffett's Nat Gas Bet is Going Bust (BRK-A)
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To be sure, Warren Buffett makes some outstanding investments, as his track record has shown continued outperformance over the last 40-plus years. But not everything turns out to be peaches and cream for the Oracle of Omaha.
Back in 2007, Buffett's Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) made a massive bet on nat gas with a multi-billion investment into Energy Future Holdings. Formerly known as TXU Corp., which was acquired by KKR & Co. (NYSE: KKR) and TPG Capital in a leveraged buyout, Buffett put $2 billion into Energy Future's corporate debt.
According to his annual shareholders letter released over the weekend, drops in nat gas prices might all but eliminate the $2 billion investment. In 2010, the asset was written down by $1 billion, with an additional $390 million taken off the books last year. Buffett said the current value of the investment is about $878 million.
To improve its capital position, Energy Future offered an exchange back in 2010 to extend debt maturities and swap securities for a discount. Buffett didn't participate in the swap, meaning his holdings are now even more subordinated.
And nat gas has a long way to go getting back to the top. From recent highs of $13 per mmBtu, the commodity fell to a low of $2.23 last week as warmer weather has weighed on demand, sending stockpiles to multi-year highs. A spokesperson for Energy Future said his firm has "fully hedged" nat gas prices for 2012, but said it still had "significant exposure," Bloomberg reported.
Really, who knows what will happen. If prices creep higher, the investment will be yet another winner for Buffett. Otherwise, $2 billion shouldn't hurt Buffett's bank too much moving forward.
Back in 2007, Buffett's Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) made a massive bet on nat gas with a multi-billion investment into Energy Future Holdings. Formerly known as TXU Corp., which was acquired by KKR & Co. (NYSE: KKR) and TPG Capital in a leveraged buyout, Buffett put $2 billion into Energy Future's corporate debt.
According to his annual shareholders letter released over the weekend, drops in nat gas prices might all but eliminate the $2 billion investment. In 2010, the asset was written down by $1 billion, with an additional $390 million taken off the books last year. Buffett said the current value of the investment is about $878 million.
To improve its capital position, Energy Future offered an exchange back in 2010 to extend debt maturities and swap securities for a discount. Buffett didn't participate in the swap, meaning his holdings are now even more subordinated.
And nat gas has a long way to go getting back to the top. From recent highs of $13 per mmBtu, the commodity fell to a low of $2.23 last week as warmer weather has weighed on demand, sending stockpiles to multi-year highs. A spokesperson for Energy Future said his firm has "fully hedged" nat gas prices for 2012, but said it still had "significant exposure," Bloomberg reported.
Really, who knows what will happen. If prices creep higher, the investment will be yet another winner for Buffett. Otherwise, $2 billion shouldn't hurt Buffett's bank too much moving forward.
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