This quarter's Berkshire Hathaway (BRK.A -0.45%) (BRK.B -0.20%) 13-F filing with the Securities and Exchange Commission -- the document that discloses the company's massive stock portfolio holdings at the end of the prior quarter -- surprised a lot of investors. We already knew that Buffett sold Berkshire's stake in the major airlines, but we didn't know what the Oracle of Omaha bagged with his elephant gun. Turns out, not much of anything: Berkshire was by far a net seller in the quarter.
One of the stocks that Buffett unloaded in the quarter was Phillips 66 (PSX -0.24%). Not only is Phillips 66 a personal holding, but it's also the oil stock I've touted the most as being worth buying in the coronavirus crash. And despite Buffett's decision to move on from my favorite oil stock, I'm not changing my view. To the contrary: It's still on my radar as a company I'm interested in buying more of.
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From the biggest shareholder to a steady seller
Warren Buffett seems to have an occasional infatuation with Phillips 66 that started before it was even a stand-alone company. In 2008, Buffett invested billions in ConocoPhillips (COP -0.45%), but at the time it was an integrated oil and gas company, not the independent producer we know it as today, resulting from the 2012 spinoff of Phillips 66 as a separate company.
Berkshire sold off all of ConocoPhillips soon after the spinoff, but kept most of the 27 million shares of Phillips 66 it got. Buffett regularly touted Phillips 66's management team as being one of the best in the business, lauding its wonderful job managing capital. It does so in two ways Buffett loves seeing from companies he invests in: buying back shares, and paying (and increasing) a great dividend.
Buffett's love affair with the company peaked in the summer of 2016, when Berkshire owned 15% of Phillips 66. The heat of summer's passion faded, and Berkshire became a net seller of the company's stock almost every quarter, finally unloading its shares completely by the end of this past March.
Reading the tea leaves
Without getting too deeply into trying to read Buffett's mind, we can see that the Berkshire portfolio has substantially reduced its exposure to the energy industry over the past few years. I think it's likely that this is intentional. As a sector, the oil and gas industry has been a terrible investment over the past decade, and it's reasonable to conclude that Buffett, along with portfolio managers Todd Combs and Ted Weschler, have found other, more compelling investment ideas outside the oil patch.
The bottom line is that with the exception of Phillips 66, Buffett's biggest oil investments have not done well. Even the sweetheart deal with Occidental Petroleum (OXY -0.25%) could be a loser if that company ends up filing for bankruptcy.
Either way, that's a lot of guessing at reasons why Buffett is selling that may or may not be correct. Moreover, it really doesn't matter why. Buffett and the other Berkshire managers aren't managing your stock portfolio.
How Phillips 66 has done since Buffett started selling
Berkshire sold the last of its Phillips 66 shares last quarter, but it was the portfolio-management equivalent of washing the dregs out of your teacup. The company sold 227,436 shares to bring its holding to zero; at one point, Berkshire had owned more than 80 million Phillips 66 shares.
Since Berkshire started selling, Phillips 66 has been a solid investment. The coronavirus crash has cratered its stock price and erased a massive portion of its gains, but at the peak in late 2019, Phillips 66 investors had enjoyed more than 60% in total returns since Buffett started selling. That was actually a little better than the market as a whole, as illustrated by the SPDR S&P 500 ETF Trust (SPY 0.67%):
PSX Total Return Price data by YCharts.
That past performance doesn't make Phillips 66 a buy, but it's a reminder that it's steadily been one of the best investments in oil and gas. That solid performance is a product both of the parts of the oil and gas business it operates in that give it some durable advantages, and of how well its management team has proven able to navigate oil markets.
Why it's a buy today
As a starting point, Phillips 66 isn't an oil producer. That part of the business stayed with ConocoPhillips when the two split, and that's proven a big benefit. Oil prices have spent the past eight years going through extreme volatility, with two massive price crashes that have hit the stand-alone producer far more than the integrated midstream, refining, and petrochemicals producer.
To the contrary, while low prices have weighed on ConocoPhillips, Phillips 66's advanced refineries have unlocked more profits when U.S. oil is cheaper than overseas crude. It's not only been a better investment than the producer, it's outperformed the market:
PSX Total Return Price data by YCharts.
Next, Phillips 66 also counts on natural gas for its fastest-growing businesses in the midstream and chemicals segments. Natural gas demand hasn't been hit nearly as hard as oil, because it's used more for electricity production and as a feedstock to make things like plastics -- think bleach and hand-sanitizer bottles -- and fertilizers. So while the refining and fuel marketing segments will struggle for much of 2020, this weakness will be partly offset by its other segments.
The business is holding up well enough, along with a rock-solid balance sheet, that the board of directors made the call just last week to maintain the quarterly dividend, while other oil giants have had to cut their payouts.
Lastly, the oil crash has turned Phillips 66 into an absolute bargain. Shares have recovered from the bottom, but are still down more than 30% this year. Considering the company's ability to weather the current environment, and that its segments should prove some of the quickest to profit from the eventual recovery in oil demand, it's absolutely worth buying now -- even if Buffett and Berkshire have moved on.
