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Warren Buffet looks to Phillips 66

Just eight days after the initial news that Warren Buffet’s Berkshire Hathaway Inc. (ticker: BRK.A) had invested $4.5 billion in Phillips 66, Buffet’s firm decided to purchase an additional 3.5 million shares of the company, bringing its total share in PSX to 11.4%. Berkshire’s stake in the company is now worth $4.96 billion, based on Phillips 66’s Wednesday closing price of $80.65.

Berkshire’s decision came a day after the announcement that Phillips 66, along with its partner Spectra Energy (ticker: SE), announced plans to strengthen their 50/50 joint venture in DCP Midstream. The companies have entered into a nonbinding letter of intent for contributing assets to strengthen DCP Midstream, according to a press release from the companies. Spectra has agreed to contribute its ownership interests in both the Sand Hills and Southern Hills NGL pipelines, while PSX has agreed to contribute $1.5 billion in cash, which is expected to be used to pay down a portion of the DCP’s revolving credit facility.

A note from Roger Read at Wells Fargo said that the immediate effects of the deal might be negative, but overall, it would mean long-term gains. “We do consider the resolution of the DCP overhang a slight positive event for PSX on a medium-term basis and it removes the overhang of financial uncertainty and the risks of a much larger commitment from PSX,” the analyst’s note read.

DCP is a gathering and processing focused company, processing approximately 6.5 trillion BTUs of gas every day, according to the company. DCP’s natural gas liquids production is also about 455,000 barrels per day. The company’s asset base includes 63 plants and approximately 67,900 miles of pipeline in the Eagle Ford, DJ Basin, Permian and the Midcontinent.

Phillips 66

Warren Buffet is regarded by many on Wall Street as the most successful investor of the 20th century, often regarded as a guru of the markets. Buffet’s firm, Berkshire Hathaway, recently jumped back into the oil and gas sector with a $4.5 billion purchase of Phillips 66 (ticker: PSX) shares, signaling to the markets that one of the best is looking to get increase his position in the industry.

The likely reason behind choosing Phillips 66 over other firms was the company’s strong non-refining sectors, like its midstream unit, which stand to benefit if oil and gas prices rebound. Not only does the company already have a strong base of operations, reporting net income of $42 million and distributable cash flow (DCF) of $47.8 million in the second quarter of 2015, according to the company’s quarterly release, but it also looking to expand those assets further.

Phillips 66 is currently targeting the build out of its midstream assets and its master limited partnership vehicle, according to the company’s capital plan. Of the $4.6 billion the company plans to spend, an estimated $3.2 billion (about 70%) will be directed at the company’s natural gas liquids and transportation business lines. More than $3.3 billion of the expenditures were classified as “growth capital,” with the midstream portion of the company expected to receive 90% of that capital.

Phillips 66

Berkshire increases investment in Phillips 66

In addition to handling uncertainties with DCP, PSX also enjoys the backing of a strong parent company in Phillips 66 Partners (ticker: PSXP). In EnerCom’s MLP Weekly, PSXP compares favorably to its peers. Its dividend coverage ratio of 1.4x is more than twice the group median of 0.6x, its debt-to-market cap of 24% is well below the group median of 77%, and its ROE of 48.3% exceeds the group median of 16.8%.

Phillips 66


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