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Warren Buffett has done it again. The Oracle of Omaha has made another large, high-profile investment that has caught investors’ attention. This time, Buffett and his firm Berkshire Hathaway (NYSE: BRK-B) have set their sights on oil refiner Phillips 66 (NYSE: PSX).
Berkshire has taken a 10% stake in Phillips 66, equating to a nearly $5 billion investment. Here’s why Buffett has made such a significant investment in Phillips 66.
Effective Management, Strong Business Model
Phillips 66 might seem like just another Big Oil stock that is getting hammered by low oil prices, but that is actually not the case. Looking closer, Phillips 66 is an oil refining company. In typical Buffett fashion, the legendary investor said first and foremost he likes Phillips 66’s management team.
Phillips 66 management is clearly doing a great job. The stock is up 9% year to date, while most energy stocks have gotten crushed this year. The reason is because Phillips 66’s fundamentals are improving strongly this year.
Over the first half of the year, adjusted profit is up 6% to $1.8 billion. Not surprisingly, refining is helping Phillips 66 the most. Refining adjusted profit rose 58% year over year.
This success is thanks to Phillips 66’s business model. It is an oil refiner, which actually performs better when oil prices decline. Over the past year, oil refiners have actually seen their profitability improve as the price of oil collapsed. The reason for that is because as oil falls, so do refining feedstock costs. This expands refiners’ spreads and margins, and results in a huge boost to earnings per share.
Buffett also said he likes the fact that Phillips 66 isn’t a pure-play refining stock. Indeed, the company has a large midstream energy transportation business, as well as a chemicals segment. However, approximately 60% of Phillips 66’s adjusted earnings over the first half of 2015 came from refining, so that should be the focus for investors. Given the benefits of the refining business model mentioned above, its refining operations are a major reason for investors to own Phillips 66 right now.
Continued Growth Fuels Cash Returns
Here’s another great aspect of owning Phillips 66: as its profits keep growing, so do the cash returns to shareholders.
Going forward, Phillips 66 has several projects in the works to keep the profits flowing. Some of these include the Sweeny Fractionator One, with a capacity of 100,000 barrels per day, and the Freeport LPG Export Terminal, with capacity for 150,000 barrels per day. The Sweeny and Freeport projects are 90% and 50% complete, and are on schedule to ramp up in the fall 2015 and second half of 2016, respectively.
This will help keep Phillips 66’s aggressive cash returns intact. Phillips 66 used $334 million to repurchase 4.2 million of its own shares just last quarter. Since July 2012, the company states, it has repurchased 83 million shares for $5.6 billion and increased its quarterly dividend by 180%. Phillips 66 still has $1.4 billion remaining in its current share buyback program, so Buffett can expect meaningful repurchases to continue for many quarters to come.
Its thriving business model, aggressive share buybacks, and its 3% dividend, mean it’s no secret why Buffett sees a lot to like in Phillips 66.
Worry-free riches
They’re owned by some of the wealthiest people on the planet. They share a few key similarities that distinguish them from 99% of equities. Even as the S&P keeps breaking record highs, they’re still crushing it. In fact, over the last ten years they’ve outpaced it by a colossal 390%. Find out more right here.