As Oil Prices Rebound, Warren Buffett Buys Into Texan Refiner

Kristian Rouz — One of America's largest multinationals, Berkshire Hathaway Inc., controlled by billionaire investor Warren Buffet, disclosed its interest in the US oil industry, along with their plans to increase their presence in energy sector. The Houston, TX-based oil refining company, Phillips 66, turned out to be partially controlled by Berkshire. Moreover, the latter just performed an insider buy, further increasing its presence in oil industry. As oil prices have performed a stunning rebound this week on the news of acceleration in US economic expansion, is the recent Buffet activity an indication of further rise in lucrativity of oil business, at least in North America?

The Omaha, NE-based Berkshire has accumulated some 58 mln equities of Phillips after performing additional buys this week. Their current stake in the refiner is at roughly 10%. Phillips' shares rallied in New York on Friday to $77 on the news, coming against the odds of the lingering global oversupply of oil, potentially turning the deal into a losing opportunity, unless US oil refining is promising larger returns in the short-to-mid-term.

Such larger returns, however, might or might not be directly linked with the anticipated steady increase in crude prices. Oil refining and petrochemicals usually boast higher value-added than plain drilling, no matter the crude price. Even more so, when a commodity is cheaper, the difference in price between the refined product and the commodity itself yields a greater spread to benefit stakeholders.

No matter Berkshire's possible business development strategy, fact of the matter is the US energy sector provides grater moneymaking opportunities compared to those before the spectacular rise in drilling in North America.

Phillips' shares had dropped to as low as $70 on Monday after an exacerbated demise in mainland China's economy stirred global concern and impaired crude prices. Thus Berkshire used a proper buying opportunity. That also means the veteran investor is not anticipating a slump in energy sector anytime soon.

Berkshire made an insider purchase of Phillips' stock this week at an average transaction price of $74.7. the total of 3.18 mln equities was bought for a sum of $237.12 mln.

According to market participants, average earnings for Phillips' would be at $6.63 per share in 2015, an annualized rise of 7.93%, all against the odds of the oil slump. With Berkshire's stake of 57.98 mln shares, the earnings in absolute numbers are at $384,4 mln. The value of Phillips' stock itself rose 7.05% over the last seven months, barely affected by the fluctuations in crude price (though there is some correlation), the trend is upward. According to insider information, Phillip's shares might soar to the value of $92.23 by the year's end. A very meaningful purchase of Buffett's, given the potential rise in Phillips' stock value might make him a profit of up to $997.80 mln.

All that said, it is either crude price likely to grow and hold steady at a higher level than now, or the increasing demand for oil products will benefit the refiners. Either way, the accelerated US growth and the coming colder months are a better environment for the energy sector.