Oil prices impact BHE
Berkshire Hathaway (BRK.B) operates in the energy sector with stakes in utilities, transmission, and marketing companies. The firm has less exposure to upstream oil exploration companies. However, higher oil prices (USO) have led to higher natural gas prices, which have impacted demand from natural-gas-fired power stations as compared to coal-fired power stations.
Berkshire owns companies through subsidiary BHE (Berkshire Hathaway Energy), in which it has a 90.4% stake. In the first quarter, Berkshire managed revenues of $4.5 billion compared to $4.2 billion in the prior-year period helped by growth in real estate brokerage, MidAmerican, Northern Powergrid, and NV Energy, partially weakened by PacifiCorp’s performance.
In the second quarter, demand from utilities and natural gas pipelines could improve, which could result in sequential growth for the segment.
Margins decline on input prices
In the first quarter, BHE’s before-tax earnings declined to $487 million from $589 million in the prior year. The decline was mainly due to lower profitability from natural gas pipelines on higher input prices, real estate brokerage losses, and the weaker performance from PacifiCorp. The higher oil and natural gas prices could continue to hurt the firm’s profitability in the second quarter.
Other major asset managers including KKR (KKR), Carlyle (CG), and Apollo (APO) have built sizable stakes in both upstream and downstream companies. Thus, higher oil prices can benefit these managers in the short to medium term.
Berkshire can target renewables and electric facilities for cars for long-term growth prospects. However, there are very few sizable and profitable opportunities given the life cycle curve for these new segments.