Few investors can move the needle like Warren Buffet, the most successful investor of the 20th century.
“The dynamism embedded in our market economy will continue to work its magic. Gains won’t come in a smooth or uninterrupted manner; they never have. And we will regularly grumble about our government. But, most assuredly, America’s best days lie ahead.”
Warren Buffet in Berkshire Hathaway’s 2014 Letter to Shareholders
In his annual letter to shareholders, the magnate preached the values of patience, confidence and sticking to your guns in difficult situations.
His words hold weight; Berkshire Hathaway bought Burlington Northern Santa Fe (BNSF) in 2009 for $26 billion in what Buffett called an “all-in wager on the economic future of the United States.” BNSF has since rebounded; its 2014 revenues and net income are 38% and 57% higher than 2010, respectively.
So what does Buffett’s $4.5 billion bet on Phillips 66 (ticker: PSX) mean? The purchase is so substantial it was kept out of the public eye for several months (the SEC occasionally lets Buffett do this to prevent ‘piggybacking’ by other investors) before Berkshire finally confirmed the investment last Friday.
The old adage of “buy low, sell high” obviously comes into play, and oil is certainly low at the moment. Refining, however, is not. First quarter profits for 2015 were up a staggering 95% compared to Q1’14, and the Energy Information Administration believes widening crack spreads and high demand for gasoline contributed to the burst. United States drivers logged more miles in the first half of 2015 than ever before, according to the Department of Transportation.
The upstream companies are ones feeling the heat. The median stock price of the 84 companies in EnerCom’s E&P Weekly Benchmarking Report has depreciated by 39% in 2015, and oilservice companies have laid off workers by hundreds of thousands.
What’s the Reasoning?
The Wall Street Journal suspects Buffett’s move is based on hopes of an infrastructure rebound. “Many non-refining businesses within Phillips 66, such as its midstream unit, are substantial and stand to benefit if currently beaten-down oil and natural-gas prices rebound,” said The Journal, adding that a buildup in fuel inventories could shrink refinery profits in the fall when driving season slows down. It says, “Rather than the refining units that are all the rage, Mr. Buffett would be more likely to target units suffering from low petroleum prices, or pipelines that offer steady, utility-like returns.”
Phillips 66, meanwhile, is in the midst of a $4.6 billion 2015 capital plan aimed at building out its midstream assets and its master limited partnership vehicle. An estimated $3.2 billion (about 70%) will be directed on natural gas liquids and transportation business lines. More than $3.3 billion of the expenditures were classified as “growth capital,” and midstream garnered nearly 90% of that particular section. Christopher Helman of Forbes points out that the similar infrastructure footprints of BNSF and PSX make Berkshire Hathaway a “natural buyer” if PSX ever decided to sell off part of its rail assets.
Icahn’s New Stake in Cheniere
Another investor who made waves in August was Carl Icahn, who took a $1 billion stake in Cheniere Energy (ticker: LNG). Cheniere is just months away from first shipment on its Corpus Christi LNG project and was one of the featured presenting companies at EnerCom’s The Oil & Gas Conference® 20. The Wall Street Journal believes liquefied natural gas export spreads have fallen into the red with the declining oil price, potentially stalling Cheniere’s expansion plans. But The Journal explains: “[This] may be what Mr. Icahn has his eye on: pushing Cheniere to scale back its ambitions and focus on churning out cash for distribution from existing contracts. An oil rally would turbocharge things.”
Icahn secured two seats on Cheniere’s board of directors just weeks after disclosing his stake. Chris Tomlinson of The Houston Chronicle believes Icahn’s influence could more closely align management with shareholders as Cheniere’s long-awaited LNG revenue finally hits the books. Icahn holds a polarizing reputation of shaking up companies that he believes have underperforming stock prices.
But Phillips 66 is not perceived as one of those companies. As a sidenote, Helman reminds the masses that Berkshire will bring in $130 million annually on PSX’s 3% dividend.
