Replies to post #146 on Phillips 66 (PSX)

[Timothy Smith]

Read that this AM. Very nice move. The first of many in this sector in my opinion that are to be expected. Watch for $XOM again soon.

[Timothy Smith]

Warren Buffett’s commitment to PSX might look like a case of buying at the top, as factors such as wide spreads between prices for U.S. crude and refined products on global markets have made the past several quarters some of the most profitable ever for U.S. refiners and stocks of refining companies have enjoyed a strong YTD rally.

But Heard On The Street's Spencer Jakab says many non-refining businesses within PSX, such as its midstream unit, are substantial and stand to benefit if beaten-down oil and natural gas prices rebound, and that Buffett actually is making his own bet on energy infrastructure.

Berkshire’s stake is too large to be a simple portfolio move and looks more like a strategic step, Jakab writes, perhaps a shares-for-assets swap for assets complementary to BRK’s existing infrastructure that offer steady, utility-like returns, rather than the refining units that are all the rage.

[Enterprising Investor]

Buffett Refines His Taste for Phillips 66 (9/05/15)

Why Phillips 66 shares could rise 35%.

Warren Buffett has rediscovered the appeal of the country’s top independent oil refiner, Phillips 66. Buffett’s Berkshire Hathaway recently disclosed that it has taken a 10.8% stake in the company, now valued at $4.5 billion. Berkshire held a smaller interest in Phillips until 2013, when it swapped most of that stake, some $1.35 billion of Phillips stock, for a chemical business owned by Phillips that was folded into Berkshire’s Lubrizol division.

Phillips (ticker: PSX) has been a big winner since it was spun out of ConocoPhillips (COP) in 2012, more than doubling in value while its former parent has languished, falling 15% due to the sharp drop in oil and natural-gas prices. Barron’s has been bullish on Phillips 66 from the start (“The Right Spin on Phillips,” May 7, 2012) and earlier this year (“Phillips 66 Shares Could Rise Sharply,” Jan. 19).

Phillips shares, which were flat last week after the Berkshire (BRKA) disclosure, still look appealing. They trade for about 12 times projected 2015 earnings of $6.65 a share, a premium to rivals Marathon Petroleum (MPC) and Valero Energy (VLO), which both fetch about eight times expected 2015 profits. Evan Calio, an energy analyst at Morgan Stanley, has an Overweight rating on the stock and a price target of $105, from a recent $77.20. The Street sees $7 a share in 2016 earnings.

A shareholder-friendly management team led by CEO Greg Garland has sought to expand and highlight the company’s nonrefining businesses, notably chemicals and “midstream,” which involves energy pipelines and other infrastructure. These carry higher valuations than refining, which has been lucrative in recent years but subject to volatile margin swings. Lately, refining margins based on so-called crack spreads have tightened sharply from wide levels. Refining accounted for 60% of Phillips’ earnings in the second quarter. Garland’s aggressive goal is to drop that to about a third by 2018. The greater diversity of Phillips’ profit accounts for its valuation premium versus peers.

Phillips created an MLP, Phillips 66 Partners (PSXP) in 2013, and the company has been selling, or “dropping down” midstream assets into the partnership, taking advantage of the valuation arbitrage between the highly valued midstream segment and the lowly refining sector. Calio sees $18 billion of possible asset dropdowns to the MLP through 2018 although the sharp pullback in the MLP sector this year could reduce that potential. Phillips also has an attractive chemicals joint venture with Chevron, and a group of gas stations and other businesses.

The company has used its ample cash flow to boost its dividend, now 56 cents a share quarterly, up from 20 cents initially after the spinoff, and repurchase stock. Phillips’ shares outstanding are down 14% since the spinoff.

Phillips probably is the kind of business that Berkshire would like to own, but the company’s market value of $42 billion probably makes it too large for Berkshire, considering the premium it would have to pay, Berkshire’s recent $32 billion deal for Precision Castparts (PCP), and Phillips’ multiyear plan to develop its nonrefining businesses. Buffett evidently believes he’s in good hands with Phillips management. That looks like a good bet.

-- Andrew Bary

http://www.barrons.com/articles/buffett-refines-his-taste-for-phillips-66-1441430423?cb=logged0.6283610163212693