U.S. stocks are posting small losses to begin the week, with the Dow Jones Industrial Average (DJINDICES:^DJI) and the benchmark S&P 500 (SNPINDEX:^GSPC) down 0.58% and 0.59%, respectively, at 2 p.m. EDT.
In the last couple of weeks, I've been banging the drum in this column regarding the materials and the energy sectors as likely sources of investment value. Contrarians and value investors, you have now been given your official starter's orders.
After last Friday's market close -- just one day after the disclosure that billionaire investor Carl Icahn has accumulated an 8.5% position in miner Freeport McMoRan -- a filing showed that Warren Buffett's Berkshire Hathaway has become the largest shareholder in refiner Phillips 66, with a greater than 10% stake, valued at roughly $4.5 billion.
Berkshire's shareholding leapt from 7.5 million shares at the end of the first quarter to 58 million at the end of last week.
On the face of it, the investment is a bit of a head-scratcher. Warren Buffett's forays into the oil and gas sector have met with mixed success. His 2003 investment in PetroChina earned an estimated return of 600% over a four-plus period; however, in his 2008 letter to Berkshire shareholders, he made this mea culpa:
Last year I made a major mistake of commission (and maybe more; this one sticks out). Without urging from Charlie [Munger] or anyone else, I bought a large amount of ConocoPhillips stock when oil and gas prices were near their peak. I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year. I still believe the odds are good that oil sells far higher in the future than the current $40-$50 price. But so far I have been dead wrong. Even if prices should rise, moreover, the terrible timing of my purchase has cost Berkshire several billion dollars.
Berkshire vice-chairman Charlie Munger credits Warren Buffett's to his being a "learning machine." In this instance, it appears Buffett has learned that, for a long-term investor, it is more opportune to buy oil and gas companies after a "dramatic fall" in oil to $40-$50 (which is where we're back to now) than before.
Incidentally, Buffett was already very familiar with Phillips 66, as Berkshire had received shares of the company when it was spun out of... ConocoPhillips.
Spencer Jakab of The Wall Street Journal's Heard on the Street column has an interesting take on the attractiveness of Phillips 66 for Buffett:
Many non-refining businesses within Phillips 66, such as its midstream unit, are substantial and stand to benefit if currently beaten-down oil and natural-gas prices rebound. That business is absorbing the lion's share of capital expenditure -- a contrarian move worthy of Mr. Buffett himself. In fact, he is making his own big bet on energy infrastructure.
In 2014, Berkshire Hathaway Energy absorbed 43% of all capital expenditure at the conglomerate, exceeding even its huge, capital-intensive railroad, Burlington Northern Santa Fe.
Clearly then, Phillips 66, with its valuable assets outside of red-hot refining, is a company making the sorts of investments that Mr. Buffett values, and in the types of assets he covets.
It's quite true that oil and gas pipelines are not very different from railroad tracks or power-generation plants from a business standpoint in that they are assets that are difficult to reproduce, and therefore constitute a substantial barrier to entry against competition.
There is every reason to believe Berkshire's investment in Phillips 66 stake will produce satisfying returns -- as long as he holds it through several cycles in the energy market this time.
Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.