Last month, we learned that two talented, billionaire investors are buying an oil stock. But they’re not buying the big, fully integrated oil companies like ExxonMobil (NYSE: XOM) and ConocoPhillips (NYSE: COP). Instead, they’re buying up shares of an oil refiner named Phillips 66 (NYSE: PSX).
Those two investors are Dan Loeb and Warren Buffett.
Billionaire Dan Loeb is the founder of the Third Point hedge fund. He’s well known in Wall Street circles, but Loeb is less familiar than other big investors like Buffett and Carl Icahn. Loeb is an animated hedge fund manager who’s known for his scathing letters to companies.
He took on Sony (NYSE: SNE) a couple years ago, prompting George Clooney to call him a “carpetbagger.” He’s also been battling Sotheby’s (NYSE: BID), where former CEO William Ruprecht called him a “scumbag.” He’s even been called the “Kanye West of Wall Street” by a fellow hedge fund manager.
Regardless of what’s said about Loeb, he gets results and delivers returns for his investors. He’s now managing $17.5 billion after raising an additional $2.5 billion in funding at the end of 2014.
His portfolio is fairly concentrated, with an event-driven strategy. In a recent 13F filing with the SEC, Loeb revealed that his firm has been buying Phillips 66 (NYSE: PSX). His 5 million shares of the stock are valued at around $360 million, or 3.2% of the fund’s portfolio.
Warren Buffett’s Buying Phillips 66
Not even Warren Buffett saw the collapse in oil prices coming. In his annual shareholder letter, Buffett wrote, “I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year.”
Many news stories have been written about Warren Buffett selling ExxonMobil (NYSE: XOM) and ConocoPhillips (NYSE: COP). Less well reported have been some of the purchases that he’s been making.
My colleague, Jay Taylor, penned a solid piece after Buffett’s Berkshire Hathaway (NYSE: BRK-B) gave the world a glimpse into its portfolio. But I’m more intrigued by the fact that he continues to invest in Phillips 66 stock. With the stock price dropping, Buffett has actually increased the size of his investment by 5%.
Recall that Buffett received 27 million shares of Phillips 66 when ConocoPhillips spun off its refining assets to form a new company. In the first nine months of 2014, Berkshire was selling some of its Phillips 66 stock. With new purchases of Phillips 66, Berkshire’s stake currently stands at 6.5 million shares.
Also recall that back in October, we profiled the major refinery stocks. Since then, they’ve all moved higher. Marathon Petroleum (NYSE: MPC) and Valero Energy (NYSE: VLO) are up over 50%. Meanwhile, Phillips 66 has been a laggard, rising just 25%.
This begs the question: why is Phillips 66 lagging? And perhaps more importantly, why are these two billionaires – Buffett and Loeb – buying Phillips 66 stock?
Why Buffett and Loeb Love Phillips 66
Phillips 66 is still one of the best oil refineries. On top of that, the stock is a reasonable value, trading at a price-to-earnings ratio of 9. Among the “big three” oil refineries, Phillips 66 has the highest profit margins and returns on assets. The future looks bright for the company, with earnings growth estimates at 16% next year. That growth rate is double the expected growth from Marathon and Valero.
Phillips 66 is a bit of a different breed when it comes to refiners. The company runs 15 refineries, which generate a large part of its revenues. The company also has a midstream business that offers logistics and marketing services. Then there’s the chemicals segment, which is benefiting nicely from the low natural gas prices.
Dividend investors will be attracted to this stock, too. With its $2 a share annual dividend, the stock delivers a healthy 2.6% dividend yield. It has upped its dividend every year since the spinoff from ConocoPhillips and has a payout ratio that’s just 30%.
Both Warren Buffett and Dan Loeb are buying up shares of Phillips 66. After oil prices were cut in half, they see lots of value in Phillips 66 stock. With this stock down 11% from its high, shares offer a compelling value today. If you’re looking to add exposure to oil stocks, you may want to consider buying Phillips 66.
Saudi Arabia’s Plot Backfires!
When the Saudis announced they would not cut production to bolster oil prices, the intent was obvious. The move was meant to drive down crude prices, and punish the U.S. oil industry. The US had already over taken both Saudi Arabia and Russia in crude production – and the Arabs thought they could stop it with this move. WRONG! And we’ve found a great way for the average guy to cash in.