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Berkshire's Latest Acquisition: Another Big Oil Bet


Warren Buffett invests Phillips Specialty Products Incorporated, a subsidiary of Phillips 66.

Commonly referred to as the Oracle of Omaha, Warren Buffett is one of the world's most famous investors, heralded for his simple yet effective valuation methods. So when the legendary investor makes a big bet, most are willing to follow in hopes of cashing in on Buffett's guru-like instincts. Buffett's latest bet involves a $1.4 billion arbitrage on Phillips 66 (NYSE:PSX).

According to Phillips 66, Berkshire Hathaway (NYSE:BRK.A) will give roughly 19 million shares of its 4.5% stake in Phillips 66 to the company in exchange for Phillips Specialty Products Inc. (PSPI), a wholly owned subsidiary of Phillips 66; essentially, Berkshire will be buying a part of Phillips 66 with part of Phillips 66. The deal is set to close in the first half of 2014 and, at that time, the specific number of shares will be determined by the share price at the deal's closing.

Commenting on the deal, Warren Buffett noted, "I have long been impressed by the strength of the Phillips 66 business portfolio. The flow improver business is a high-quality business with consistently strong financial performance, and it will fit well within Berkshire Hathaway."

Inside Phillips 66 and Buffett's Bet

Phillips 66 is a recent spinout from energy giant ConocoPhillips (NYSE:COP), and now houses the refining, marketing, midstream, and chemicals businesses that used to be part of the parent company. As of February 2013, Phillips owns roughly 15,000 miles of pipeline systems, and 10,000 owned or supplied branded marketing outlets across the US, Europe, and Asia. In its midstream business, Phillips transports, fractionates, and markets natural gas liquids in the United States. Currently, Phillips 66 has a market cap of over $45.8 billion and has a 2.05% dividend yield based on the current share price and the stock's annual payout of $1.56 per share. In 2013, the stock gained nearly 40%.

Phillips Specialty Products produces polymers designed to reduce drag and increase the flow potential in pipelines. According to Phillips 66, the PSPI business will have about $450 million in cash and cash equivalents on its balance sheet at the close of the Berkshire acquisition. Once the acquisition is finalized, Buffett announced that James L. Hambrick, CEO of The Lubrizol Corporation, will oversee PSPI's strategic direction. Lubrizol is a specialty chemicals manufacturer that Berkshire acquired in 2011.

By buying Phillips Specialty Products, Berkshire is essentially placing yet another bet on big oil – specifically on oil transportation. The deal also bolsters Berkshire's energy exposure, which has grown significantly over the recent years. In 2013, Berkshire took a 40-million-share stake (a $3.7 billion value) in energy giant Exxon Mobil (NYSE:XOM), and increased its stake in National-Oilwell Varco, Inc. (NYSE:NOV) by 41%. Berkshire also owns more than 24 million shares in ConocoPhillips.

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Editor's note: This article by Daniela Pylypczak was originally published on Commodity HQ.
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