For a company that has seemed impervious to what has been happening in the US economy (with the exception of insurance services), Warren Buffett’s Berkshire Hathaway has shown itself to be surprisingly vulnerable to the impact of falling oil and gas prices.
In fact that vulnerability looks like continuing for most of the rest of this year, according to the great investor himself.
Full details of the group’s March quarter result were released at the weekend and while there was no change in the headline figures released at the previous weekend’s annual meeting in Omaha, Nebraska, the nitty gritty revealed that the company has joined a growing list of victims of the slide in oil, gas and other energy demand and prices in the past year or so.
Overall, Berkshire reported $US52.40 billion in revenue for the first three months of the year, up a solid 8% from the first quarter of 2015. Berkshire reported quarterly net profit rose 8% to $US5.59 billion, while operating profit, which excludes some investment results, fell 12% to $US3.74 billion and was a more accurate guide as to the company’s trading performance in the quarter, especially in one of its key businesses, the Burlington Northern Santa Fe railroad.
A combination of cheap natural gas and a drop in coal shipments hit first-quarter results at Burlington Northern Santa Fe, the largest of all Warren Buffett’s companies.
Mr. Buffett had warned at the annual meeting that results at the railroad would remain weak for the rest of the year due to lower coal volumes largely tied to power plants’ shift to cheaper natural gas.
He said railroad carloadings industrywide fell “significantly” in the first quarter, and “almost certainly will continue to be down the balance of the year".
In the first quarter BNSF’s revenue fell 15% to $US4.77 billion from the year-ago period as shipping volumes fell 5.5%. Net profit slumped 25% to $US784 million.
The bulk of the revenue decline came from coal freight shipments, down 39% to $US779 million, thanks to a 33% drop in volume. Coal accounted for about 22% of the unit’s freight revenue in 2015.
Meanwhile, freight revenue from industrial products fell 18% while consumer products freight revenue rose 3%, reflecting a 9% increase in volumes in the quarter.
Operating expenses for BNSF fell 12%, largely due to lower fuel prices (cheaper diesel for its thousands of locomotives).
Earnings at Berkshire’s insurance business fell 55% to $US213 million for the quarter, driven mainly by lower results at its reinsurance group and rising costs of hail storms in Texas in the quarter.
