WHAT MAKE WARRENT BUFFET INVEST IN PHILIPS 66?

 

 

Hi All,

 

When we heard Warrant Buffet started to invest in oil company, are we going to bullish on energy sector?

 

Guys, waits a minute, read below article for your understanding

 

 

1. Article : Is Warren Buffett Becoming More Bullish on Energy?

 

Warren Buffett sidestepped much of the energy decline. In March 2014, Buffett's Berkshire Hathaway (NYSE: BRK-B) had substantial exposure to a number of upstream/integrated companies, including ExxonMobil (NYSE: XOM) and ConocoPhillips (NYSE: COP). According to SEC filings, Berkshire Hathaway owned over 41 million shares of ExxonMobil on March 31, 2014, worth $4 billion at the time. Berkshire also had 11 million shares of ConocoPhillips on its balance sheet, worth $779 million. 

When crude prices started showing signs of potentially falling, however, Buffett quickly cut his stake in ConocoPhillips and ExxonMobil and by December 31, 2014, Berkshire owned zero shares of either company. Buffett's decision to divest the two super-majors from Berkshire's portfolio turned out to be the right decision -- ExxonMobil has declined by 13% since December 31, 2014 while ConocoPhillips has fallen by over half. If crude stays lower for longer, the two stocks may never be the free cash flow machines that they were in the early to mid 2000's, and their returns may not be as attractive as they were historically. 

Increasing downstream exposureWhile Buffett has assiduously avoided companies with upstream exposure (with the lone exception being Suncor Energy (NYSE: SU)), Berkshire has aggressively added to its holdings downstream. According to SEC filings, Berkshire Hathaway established a position in the oil refiner Phillips 66 (NYSE: PSX) in early 2015 and gradually built its position up from that point. In early February 2015, Buffett added another 1.69 million shares, giving Berkshire a total of 74 million shares, or around 14% of Phillips 66's float.
Unlike upstream companies, oil refiners such as Phillips 66 don't need high crude prices to do well. Refiners benefit from the crack spread, or the price difference between crude oil and the petroleum products extracted from crude. Because demand for petroleum products has been robust because of the strong U.S. economy, and crude prices have been weak because of oversupply, the crack spread has been wide, and many refiners have been extremely profitable. Given the low natural gas prices and the limited capacity growth in the refining industry, the future for refiners looks bright. 

Berkshire Hathaway adding midstream exposureIn addition to purchasing Phillips 66 shares, Berkshire Hathaway also established a position in Kinder Morgan (NYSE: KMI) too. According to SEC filings, Berkshire Hathaway bought a brand-new 26.53 million share stake in the midstream giant in the fourth quarter, worth roughly $395.9 million. Kinder Morgan shares have fallen substantially over the last year due to fears that the weak energy prices could translate to less volumes that flow through Kinder Morgan's pipelines and that the resulting lower EBITDA could make it hard for Kinder Morgan to service its debt and fund its growth projects at the same time.

The bearish fears prompted the market to raise Kinder Morgan's cost of capital up to a point where Kinder management decided that they had to cut the dividend by 75% to internally fund the company's growth capital expenditures. The resulting dividend cut sent Kinder Morgan's stock even lower.



2. Oil and Gas Company by Hierarchy

Understand the hierarchy give us clear picture on business nature of the oil and gas industry. Below are the hierarchy:

 

 

 

CLIENT- This is an oil producer and the ownership of some oilfield/oilrig and responsible to refine oil to become fuel.

 

CONSULTANT- They provide engineering study of design oilfield facilities and some of the company involve in early engineering work(Conceptual , Front-End Engineering, Detail Design), later stage Construction and Commissioning.

 

CONTRACTOR/VENDOR- Mainly involve supply equipment, such as vessel, crane and pumps.

 

SERVICES COMPANY- Basically they involve in early stage or oil exploration( seabed study, drilling). They also provide maintenance services for some major equipment.

 

 

As we can see for the hierarchy, why Warrant Buffet due to the nature of the business. He bought share of oil producer company instead of in the services, consultant and contractor segment.

 

 

3. Be Wise And Smart Like Warrent Buffet

 

 

CLIENT  SEGMENT

 

PHILIP 66

 

 

 

 

PETRONAS GAS


 

SHELL-NETHERLAND


 

 

CONSULTANT  SEGMENT

 

KNM


 

SKPETRO


 

THHEVY

 

 

TECHNIP

 

 

 

These are the chart which have different segment in oil and gas industry. As u can see, most of the pattern are almost similar according to their segment.

 

So what make Warrent Buffet so smart? HE FOLLOW THE TREND!!!!!!. When oil price drop so much, this will benefit downstream segment in oil and gas which will make more profit in coming quarter. Same goes to PETRONAS Gas. This entity is refine gas for the consumer especially for household use and another alternative energy compared fuel.

 

So, he get back to fundamental basis and not invest blindly. To those who big fan of Warrent Buffet, study his pick stock and he is very selective in oil and gas stock.

 

Trade with FACT(Technical Analysis + Fundamental Study) but not with hope because HOPE is just fake satisfaction to cold down your nerve.

 

 

That's all!!!. All the best...