Should You Buy Philips 66 (PSX)? Warren Buffett Continues To Boost His Stake

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Philips 66 (NYSE:PSX) is engaged in the oil and gas sector. That clearly indicated where the company or the industry stands currently in the wake of a steep fall in the commodity price. Despite the weak oil and gas price, the company’s earnings in the last four quarters topped the Street analysts’ expectations consistently. However, the winning percentage, or the positive surprise, has been falling in the current year. In the second quarter, it was only 1.1%, compared to 5.6% in the first quarter and 19.0% in the fourth quarter of last year. Despite the industry witnessing continued sluggishness, investment guru Warrant Buffett bets on the stock. That might have surprised at least a section of the investment community at a time when most of the analysts are expecting a further downtick in oil price.

Boost The Holdings

Warren Buffett controlled Berkshire Hathaway Inc. (NYSE:BRK.A) took the falling trend to be a favorable factor, buying opportunities to boost its stake in Philips 66 (NYSE:PSX). In a recent filing with the SEC, the British firm disclosed that it boosted its stake in the American firm by acquiring 61.5 million shares, or 6%. An additional 3.5 million shares were also acquired for approximately $282 million. The Britain firm has also indicated that it was accumulating the shares of Phillips 66 since the second quarter. As a result, its stake has increased to 11% and is now valued around $4.98 billion.

Buffett has been successful in predicting the stocks most of the time and his investment thesis appeared to be not revolved around the immediate term. For instance, the investment Guru has invested in International Business Machines Corp. (NYSE:IBM), despite growing concerns over its failure in recording top line growth. Despite losing more than $1 billion in valuation, he has boosted the company’s stake in IBM. He was also categorical about one thing, i.e. he was not looking at the near term to make money, and that the investments were for the long term. Similarly, knowing very well that the oil and gas are not going to provide any immediate returns, the investments are for the long-term only. However, there might be a different opinion about it.

Ownership By Accident

If reports are to be believed, Warren Buffett became a shareholder of Philips 66 (NYSE:PSX) by accident. He did not select to have the company’s stock first. However, his journey as an owner commenced with ConocoPhillips (NYSE:COP) in 2008. After a few years, Conoco decided in favor of a pure-play exploration, as well as production firm. Later, it packaged its chemicals, refining, and midstream assets into Phillips 66. When it was split in 2012, Buffett also got the shares of the company like any other investors.

However, that did not prevent him from retaining the holdings. Unless he liked it, he would not have continued to hold. More than that, he saw an opportunity to boost his stake in the oil and gas company. Following the spin-off, his holding was approximately 4.5% only. Buffett also exited the counter partly in 2013 when he gave back 19 million shares for about $1.4 billion to the company. In return, he got one of the units from Philips 66 (NYSE:PSX) and placed it as a fully-owned subsidiary of Berkshire Hathaway Inc. (NYSE:BRK.A). That did not mean his faith in the company has dropped since he boosted his stake in the current year. The optimism is partly due to the futuristic outlook also. Let’s look at them.

Steps To Ensure Future Growth

The company seems to be taking steps to ensure that the future looks strong. One of the reasons for such optimism is that it has been investing in higher margin midstream, as well as chemicals divisions. Both are going to play a crucial role in the next few years and will be the driver for strong earnings growth during the same period. At the same time, it has also been investing in its refining division to enhance its returns so as to boost the segment’s profitability.

As far as the investors are concerned, the company, as well as some analysts, are confident that the investments would enable Philips 66 (NYSE:PSX) to generate cash. That should allow the company to return capital to investors by way of dividend and share buyback. It is to be remembered that the company repurchased over 10% of its outstanding shares after being spun off. That included the stocks handed over by Buffett. In the last three years, its dividend jumped more than 150%. There is a possibility that the company might continue to boost its dividend rate since the share counts will drop while profit is heading higher. For instance, its second quarter adjusted earnings advanced 16%, to $1.0 billion, from $863 million in the year-ago quarter. While announcing results, the company also boosted dividend by 12%, to 56 cents a share for a quarter.

PE Ratio

Philips 66 (NYSE:PSX)’s PE ratio is only ten times compared to the industry PE ratio of 21 times. This is a parameter where the company is sitting stronger. Until now, the stock provided solid returns for Warrant Buffett. That was by way of dividend growth and also due to some swapping of the stock. Therefore, when he decides to sell his entire stake, he might be standing on the gainers list. A similar opportunity exists for fresh investors also.

Import Customer of Another Berkshire Company

Interestingly enough Phillips is a key customer of Berkshire Hathaway’s BNSF railroad division. BNSF is one of the biggest players in crude delivery by rail. BNSF has benefited as America’s oil boom has overwhelmed pipeline capacity and midstream operators like Phillips has turned to the rails to deliver crude. BNSF’s lines service the majority of Phillips’ refining complexes as shown by these asset maps (Available here for BNSF,here for Phillips 66). Phillips itself has built crude rail car facilities which the company touts as one of the most modern crude rail fleets in service in the industry.  Phillips has more than 11,000 tanker cars with more in the works.

Conclusion

Though the oil and gas sector might be going through a bad phase, Philips 66 (NYSE:PSX) shares look solid and poised for growth only. That is the reason Buffett preferred to boost his stake. The PE ratio also appeared to be lower than the industry’s, suggesting enough opportunity for upside rewards. The timing appears to be right to enter the counter to realize higher gains when the oil and gas industry turns to positive.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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