Did Warren Buffett Just Tip His Hand About His Next Elephant Hunt?

Warren Buffett is usually pretty secretive when he makes an acquisition, but his latest move could signal what he’s planning next.

Jan 3, 2014 at 11:03AM


Photo credit: Phillips 66. 

Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) ended 2013 with a bang. Unfortunately, for Buffett and Berkshire Hathaway that bang was quite literal as a train owned by its BNSF Railway subsidiary derailed Monday and burst into flames. It was just another reminder of the explosive risk of transporting crude oil by rail.

While Buffett has enjoyed the oil-fueled profits that America's energy boom brought to BNSF, it's quite obvious that there are real risks to these future profits. Some are calling for billions of dollars to be spent to upgrade rail cars to mitigate these risks. The problem there is that transporting crude oil by rail is already expensive for oil producers. Pipelines, on the other hand, are a far cheaper and safer mode of transport.

Oddly enough, the same day the BNSF trail derailed Buffett made a quiet deal with pipelines very much in focus. Berkshire Hathaway will acquire the Phillips Specialty Products unit of Phillips 66 (NYSE:PSX). That unit specializes in developing polymers that maximize the flow potential of pipelines. In acquiring that technology, Buffett really seems to be tipping his hand as to where he and Berkshire Hathaway might go elephant hunting next.

In the press release announcing the deal, Buffett said that he has "long been impressed by the strength of the Phillips 66 business portfolio." Buffett has his money where his mouth is, as Berkshire Hathaway owns 27.1 million shares of Phillips 66. While he is trading about 19 million of those shares back to Phillips 66 for the specialty products unit, he'll still own about a half a billion dollars' worth of the energy company's shares. Is it possible that Buffett might poach a few more business units out of Phillips 66?

Few companies have been as aggressive as Phillips 66 in pursuing access to American crude oil. The company has bought more than 2,000 railcars, as well as a couple Jones Act ships. It's also investing heavily to grow both DCP Midstream Partners (NYSE:DPM) and Phillips 66 Partners (NYSE:PSXP), the two master limited partnerships that it controls. Given his fondness for the company, it is possible that Buffett might want to buy more of Phillips 66's energy transportation portfolio.

However, Buffett typically looks for elephant-sized acquisitions. A company, say, about the size of Phillips 66, which at more than $45 billion in market capitalization would be quite the elephant. However, it's a company that would fit in well with Buffett's other capital-intensive holdings, including MidAmerican Energy Holdings and BNSF.

With its portfolio of oil refineries, midstream assets, and growing petrochemical business,  Buffett could make a massive bet on America's energy boom by simply buying Phillips 66. What's unique about Phillips 66 is that it's not only an investment in the transport of oil and gas by pipeline, but it's a play on the next phase of America's boom, which is increased domestic consumption. Phillips 66 is leading the way not only to use more American oil for its refinery business, but also use our abundant natural gas supplies to fuel its petrochemical complexes.

There is no doubt that Phillips 66 would be a big acquisition, even for Warren Buffett. Furthermore, it's not the pure play on shipping oil by pipelines that the Phillips Specialty Products unit acquisition would seem to suggest is Buffett's next buy. That said, there is some merit to the idea that Buffett might want to eventually own one of the end users of the crude oil being shipped by BNSF. In which case, Phillips 66 would be the ideal deal for Buffett.

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Fool contributor Matt DiLallo owns shares of Phillips 66. The Motley Fool recommends Berkshire Hathaway and DCP Midstream Partners, LP. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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