Warren Buffett Just Missed Buying the Business That Could Power the Energy World for Decades

Berkshire Hathaway just bought the flow improver part of Phillips 66's Specialty Products, but had he bought the entire division he could have been the gatekeeper to the biggest need in the world of alternative energy.

Jan 5, 2014 at 12:23PM

Perhaps Warren Buffet should just start wearing a wizard hat. Source: The White House

Warren Buffett is the grand wizard of deal making in the energy space. On the surface, they are all simple, innocuous businesses that have extremely strong competitive advantages. If you dig deeper, though, you start to realize the sheer genius behind his decisions. His move to buy NV Energy made him the gatekeeper to solar energy in California, and buying Burlington Northern Santa Fe also gave him a near monopoly on moving Canadian oil to America via rail.

This time, though, Berkshire Hathaway (NYSE:BRK-B) just missed making a similar move when it bought the flow improver segment of Phillips Specialty Products from Phillips 66 (NYSE:PSX). The part he could have also bought was the part that could make Tesla Motors (NASDAQ:TSLA) and nearly every alternative energy business a much more potent force on the market. What part did he miss out on? Let's take a deeper dive into this little known segment of Phillips 66 and what it could mean to the energy sector. 

What Berkshire bought
Unless you enjoy afternoons dutifully reading through Phillips 66's 10-K, you've probably never heard of Phillips Specialty Products. It's not part of CPChem, the joint venture with Chevron (NYSE:CVX) to manufacture petroleum-based chemicals, but instead a part of the business that only garners two sentences under its refining and marketing business: 

Specialty businesses
We manufacture and sell a variety of specialty products including pipeline flow improvers and anode material for high-power lithium-ion batteries. Our specialty products are marketed under the LiquidPower and CPreme brand names.

Of course, one major advantage that Warren Buffett has over me and you is that Berkshire owned more than 4.5% of all shares outstanding, which gives him a much more intimate knowledge of the business. It was that knowledge that made him confident enough to abandon 70% of his stake in Phillips 66 for just one half of two sentences in a 10-K.

LiquidPower is a product designed to improve the flow of crude in pipelines. By reducing the friction between the oil and pipe, it allows oil to move faster, and therefore increase the daily takeaway capacity of a pipeline. If we look across the landscape of America's energy infrastructure, we can understand why a product like this is so important. The boom in American oil has put an immense amount of strain on our pipeline infrastructure, and the debate over constructing pipelines between the U.S. and Canada has made existing pipes prime real estate. Any advantage this business provides to pipeline companies is likely to come at a price, and Warren Buffett just became a major player.

What Berkshire missed
As promising as the flow improver aspect of the business may be, the other part could become even bigger. Phillips Specialty Products also manufactures graphite powder for use in lithium-ion batteries. This graphite powder -- the anode of a battery -- stores lithium ions when the battery is charged and transfers them to a coating of cobalt oxide -- the cathode -- which results in a discharge of electrons and thus electricity.


Tesla's battery packs, now fueled by Warren Buffett?

One of the biggest drawbacks with lithium-ion batteries is that the transfer of lithium ions from the graphite anode to the cobalt oxide cathode generates immense amounts of thermal energy. This reduces the total efficiency of the battery and can eventually lead to a breakdown of the anode and make the battery less effective over time.

This is also one of the greatest weaknesses for Tesla Motors and nearly all electric vehicles. The amount of thermal energy created by the battery reduces the range of the car, and the breakdown of the graphite anode can result in the battery pack's range decreasing over time. 

Well, guess what Phillips Specialty Products' graphite is specifically designed to do? Decrease thermal energy generation and prevent graphite breakdown of the anode. After 300 cycles -- a cycle is one charge and one discharge -- batteries using Phillips' Cpreme will retain greater than 90% of their original capacity, versus 80% for other standard graphite anodes. A specialty graphite that can not only increase total efficiency of a battery but also maintain its integrity over time could be an extremely valuable product for anyone that uses lithium-ion batteries.

If there was ever a need for greater battery technology, it is today. A report by Pike Research suggests that the electric-vehicle market could reach as much as 3.8 million vehicles annually by 2020 -- that's a compounded annual growth rate of 71.5% from 2013's total plug-in vehicle sales of about 86,000 -- and that doesn't include the battery packs needed for hybrids, either. 

Furthermore, large lithium-ion battery power packs are starting to find their way into distributed solar installations as well. Tesla Motors just recently signed a deal with SolarCity (NASDAQ:SCTY) to use Tesla's battery technology for on-site energy storage in a bundled offer from SolarCity to commercial customers. Next year, SolarCity expects to install energy storage options totaling about 50 megawatts, but that could become even greater as the company develops relationships with major clients such as Wal-Mart and the U.S. military.  

These are just small examples of the potential this market has. Just to give you perspective on this, when the CEOs of oil giants Total and Eni were asked at a recent speaking event where they would invest if they were to start from scratch today, the consensus from both of them was battery technology. If CEOs of two of the world's 10 largest oil companies would bet their money on batteries, then you know something is going on there.

What this Fool believes
For many years, Warren Buffett has eschewed investing in technology stocks for the safer plays like Coca-Cola and Wal-Mart. Perhaps that was why he decided to pass on CPreme and stick to his other major energy investments in oil and gas. Had he decided to go all in with Phillips Specialty Products, though, he could have held a top-flight technology that could be a major determinant on alternative energy's long-term success. If this market grows as much as expected, then it's very possible that the oil flow improver business could be a worth a fraction of the graphite anode business. 

There is no doubt that Warren Buffett will be perfectly content with his purchase of Phillips flow improver segment, and his reputation as an investor deserves respect from all of us. It does make you wonder, though, will he kick himself in a couple years for not picking up the other half of Phillips Specialty Products?

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Fool contributor Tyler Crowe owns shares of Berkshire Hathaway and SolarCity. You can follow him at Fool.com under the handle TMFDirtyBird, on Google+, or on Twitter, @TylerCroweFool.

The Motley Fool recommends Berkshire Hathaway, Chevron, Coca-Cola, SolarCity, Tesla Motors, and Total SA. The Motley Fool owns shares of Berkshire Hathaway, Coca-Cola, SolarCity, and Tesla Motors. 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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