Macroeconomics, Insurance to Dictate Berkshire Hathaway's 2H17

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Part 4
Macroeconomics, Insurance to Dictate Berkshire Hathaway's 2H17 PART 4 OF 11

Berkshire Hathaway’s Energy Earnings Could Rise on Power, Oil

Hedging in the hedged portfolio

Berkshire Hathaway (BRK.B) deploys funds across the sectors. It has hedged its energy portfolio by investing in utilities, marketing, upstream, downstream, and transmission businesses. That has resulted in stable earnings that are less correlated to fluctuating oil prices (USO). Higher energy consumption could drive the division’s earnings in the second half of 2017. Berkshire manages its energy portfolio through its Berkshire Hathaway Energy (or BHE) subsidiary, holding a 90.2% stake. BHE has investments in utilities, upstream and downstream, and transmission.

BHE’s major subsidiary companies include MidAmerican Energy, PacifiCorp, and NV Energy. Oil prices are trending above $50, which could result in higher earnings for coal and natural gas–fired power stations, resulting in higher revenues for Berkshire.

Berkshire Hathaway&#8217;s Energy Earnings Could Rise on Power, Oil

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In 2Q17, Berkshire’s BHE saw revenues of ~$4.6 billion compared to $4.3 billion in the prior year. That growth came from MidAmerican Energy, PacifiCorp, NV Energy, and real estate brokerages, partially offset by a weaker performance from Northern Powergrid. The performance could improve in the upcoming quarters due to a marginal rise in price per unit as well as consumption.

Transmission and utilities

Berkshire hasn’t looked for acquisitions in utilities beyond the United States, and there is no indication of any acquisitions internationally on the horizon. However, the company’s new managers could grow the portfolio and hedge it from a regions perspective by investing in Europe and Asia.

In 2Q17, BHE’s earnings before tax rose to $670.0 million compared to $666.0 million in the prior year. Its operating earnings were helped by growth in NV Energy and real estate brokerage, partially offset by a decline in natural gas pipelines, MidAmerican Energy, Northern Powergrid, and other energy businesses.

Berkshire Hathaway faces competition from utilities (XLU) and alternative managers (IYF) such as Blackstone Group (BX), Carlyle Group (CG), and KKR (KKR).


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