How Warren Buffett May Profit From the Gulf Oil Spill

Last Updated May 12, 2010 3:31 PM EDT

Two years ago billionaire investor Warren Buffett's company Berkshire Hathaway (BRK.A) snapped up 8.7 million shares of Nalco Holding (NLC), a move that some speculated, at the time, was a bet on water filtration. Berkshire Hathaway's 6 percent ownership of Nalco (9 million shares as of Dec. 31, 2009) turns out to be a play in the business of oil spills as well.

Nalco is one the world's largest water-treatment companies and a big part of its business is to help energy, paper and other major industries improve water use. The company also happens to own a proprietary chemical that breaks down oil in water. And this chemical is being used by BP to combat the 210,000-gallon-a-day oil spill in the Gulf of Mexico. About 372,000 gallons of dispersants have been used and about 180,000 gallons of supply remain, according to the latest update from government's joint information center.

The run on Nalco's dispersant has yet to make a substantial impact to its bottom line, CEO Erik Fyrwald said last week in a statement. For one, chemical dispersant are just a small part of its overall business. In short, Nalco will have to sell a lot more dispersant before it generate substantial profits. Of course, that could very well happen if BP doesn't stop the deepwater oil leak soon.

Buffett may be called the oracle, but it's not like the guy peered into his crystal ball one day and saw the BP oil spill. Instead, he saw an increasing need for water-intensive industries like mining and oil and gas to find ways to manage its water use more effectively.

And it hasn't been a bad bet. After Nalco shares hit $8.95 per share in late 2008, they have risen steadily ever since. In the past year, Nalco stock has risen more than 45 percent to above $25 per share.

Berkshire, which has curbed its insurance coverage amid declining rates, is looking for opportunities in other areas, including energy. The energy investments run the gamut and include railroads and utilities. But there's a common thread -- or bet, if you will -- on the world's appetite for energy, and more specifically, power generation.
  • Burlington Northern Santa Fe: Berkshire's $27 billion takeover of the railroad last year -- the most expensive investment of Buffett's career -- was seen as the oracle's wager on the economic future of the United States. It's also a bet on higher gas prices, fewer tractor trailers, more American exports and -- perhaps surprising to some -- more coal-burning electricity plants.
  • Oil companies: ConocoPhillips (COP) and Exxon (XOM): Buffett's investment in Conoco isn't one to be envied. He bought into the company when the world had reached the top of the oil boom. Berkshire sold more than half of its Conoco position in 2009, among its largest sales in 2009. Bad timing aside, Berkshire is still committed to the traditional integrated oil company with its holdings in Exxon and Conoco.
  • NRG Energy: Berkshire owns about 2.2 percent of NRG, the second-largest power producer in Texas. NRG's businesses include forays into nuclear, solar and wind energy, including BluewaterWind, its offshore wind development company.
Photo of Warren Buffett from wikimedia commons See additional BNET coverage of the Gulf of Mexico oil spill:
  • Kirsten Korosec

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