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

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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Read/Post Comments (13) | Recommend This Article (16)

Comments from our Foolish Readers

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  • Report this Comment On January 05, 2014, at 1:59 PM, duuude1 wrote:

    Has Buffet ever kicked himself for "missed opportunities"? I'm sure when he was younger and before he learned how to control his emotions and before he became the wise-duuude he is now - he probably felt the regrets and foolish thoughts of "missed opportunities" most of us do now.

    Each of Buffett's decisions to invest is as clear as a decision to NOT invest. Right? What's one of his famous quotes...

    "The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch. The problem when you’re a money manager is that your fans keep yelling, ‘Swing, you bum!’"

    Sometimes your fans are your own thoughts. Ignore the stupids!


  • Report this Comment On January 05, 2014, at 4:07 PM, weaponz wrote:

    One thing to consider. New lithium ion batteries are now coming with silicon anode. Also, 80% loss after 300 cycles might be standard for consumer LCO batteries, but most graphite batteries with other chemistry do way better than 90% at 300 cycles. 90% at 300 cycles is not automotive grade batteries.

  • Report this Comment On January 06, 2014, at 12:19 AM, mikezuka wrote:

    Battery capacity technology research is going in many radical directions. Why invest in it until a game changer emerges?

  • Report this Comment On January 06, 2014, at 4:50 AM, Ostrowsr wrote:

    I don't understand. Instead of 300 cycles, this "super" graphite lasts 330 cycles? 80% to 90% is not a great improvement. Seems like it's better to find a way to take away the heat generated to keep the graphite cooler. Then use the heat to warm buildings, etc.

  • Report this Comment On January 06, 2014, at 9:48 AM, ilovesumm wrote:

    I disagree with you and agree with Buffett .

    You suggest he should buy something that COULD be valuable someday . He on the other had is buying something that IS valuable today and in the future.

  • Report this Comment On January 06, 2014, at 11:58 AM, danm6 wrote:

    I happen to have a PhD in physics and have been part of the energy business for over 30 years. So, I've been following energy storage technology carefully. One problem that I have with articles written by business analysts is that they don't seem to reflect an understanding of the technologies.

    Battery storage needs orders of magnitude improvements to be truly competitive with energy storage in fossil fuels. All that is needed to see this is looking at Wikipedia for energy density for rechargeable lithium-ion batteries and gasoline. The difference between the upper end of lithium-ion and gasoline is ~14. Thus, a small improvement, like that quoted here, is not something that will change the economics of energy storage substantially. It would be worthwhile for pundits to do 10 minutes of research into the fundamentals before making a judgement.

  • Report this Comment On January 06, 2014, at 2:04 PM, ifool100 wrote:

    Tough call to second guess Buffett, but I admire your pluck.

  • Report this Comment On January 06, 2014, at 5:03 PM, coloneltom1 wrote:

    Forget solar and wind, read about it works 24/7 day and night for hundreds of years with very little maintenance.

  • Report this Comment On January 06, 2014, at 11:50 PM, weaponz wrote:

    @danm6 - If you have a PhD in physics, then you realize your statement is just as deceptive as the statements by 10 minute pundits. Because energy density is not the entire equation. You have to look at ability to do intended work to get the entire equation.

    At issue is we have no efficient way of getting energy out of gasoline and have not been able to for over 100 years. In comparison to gasoline, lithium ion batteries are much more efficient.

    A US gallon of gasoline has 33.7kwh of energy. That is enough energy to propel a 4600lb EV 105 miles. Try doing that with 1 gallon of gasoline.

  • Report this Comment On January 07, 2014, at 8:49 AM, duuude1 wrote:

    Great point weaponz - it doesn't matter if you have a million $$ in a bank account if the bank charges 90% fees on withdrawal - you can only effectively access $100k (10% efficiency). That's exactly equivalent to having $100k in another bank who charges nothing to withdraw (100% efficiency).

    What we know today is that Tesla has configured his batteries to efficiently access the energy, and that it appears to be very cost-effective compared to gasoline.


  • Report this Comment On January 07, 2014, at 9:32 AM, TMFDirtyBird wrote:

    Hey all,

    Eventhough there are a few jabs in there, I appreciate the commentary.

    One more thing I would like to point out about the energy density debate is that the instability of lithium ion batteries has by and large created some design obstacles for larger energy storage packs.

    If you look at the guts of a battery pack for tesla or most other EVs, it is several small lithium ion batteries connected in series. The individual batteries themselves are kept to a small size to prevent overheating and breakdown.

    With more efficient transfer of lithium ions from better performing graphite (or silicon anodes as Ostrowsr mentioned), you can actually increase the size of the individual battery without risking breakdown.

    With larger batteries, there is less space within the power pack dedicated to insulation and battery spacing, which leads to more energy storage material in the fixed volume of the power pack.

    In this case, its not necessarily a case of improving the physics of the battery, but it allows for a more efficient design that will lead to increased range.

    Thanks again

  • Report this Comment On January 07, 2014, at 11:28 AM, anash91 wrote:

    I always thought he said invest in what you know. He doesn't know batteries, therefore he doesn't invest in them.

  • Report this Comment On January 07, 2014, at 8:39 PM, jfinlayson wrote:

    Should we be nervous about Berkshire's purchase of a technology that makes pipeline oil delivery more efficient? Berkshire's oil-by-rail company BNSF competes directly with pipelines, so Berkshire arguably might have an incentive to purchase that technology with the intention sitting on it -- that is, preventing it from coming to market. It wouldn't be the first time that strategy was deployed.

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