"On Aug. 31, the first trading day after Berkshire [Hathaway]'s new purchases of Phillips 66 shares were made public, the stock rose 2.4% to close at $79.07 (the S&P 500 Energy index rose 1.1% that day). I suspect time will show that was also a significant under-reaction."
That is how I concluded this column on Tuesday, pointing out that investors still had the opportunity to buy shares of refiner Phillips 66 at a better price than Warren Buffett; his company, Berkshire Hathaway bought 50.5 million shares between April 1 and Aug. 25. I based that analysis on a calculation showing that $78.88 is a hard floor for the average price obtained by Mr. Buffett.
I thought the market was correcting its (hypothetical) under-reaction to the news of the large increase in Berkshire's ownership stake on Tuesday and Wednesday this week. Indeed, Mr. Buffett appeared in televised interviews on Tuesday with both CNBC and Bloomberg television, discussing his rationale for the purchase of Phillips shares (among other things). Phillips 66 gained 3.5% and 1% on Tuesday and Wednesday, respectively, against 1.3% and (1.9%) for the S&P 500 Energy index.
It turns out that "the market" may have had nothing to do with that out-performance; in fact, it looks like the buyer pushing the price up during those days was none other than Warren Buffett himself.
Yesterday afternoon, Berkshire Hathaway disclosed in a filing that it had bought an additional 3.5 million shares beginning last Friday through Wednesday. The filing was required because Berkshire Hathaway already owned more than 10% of the shares outstanding prior to this latest round of purchases, which brought its ownership stake to 11.4%.
During those three days, Berkshire represented just over a fifth of the trading volume in Phillips 66 shares! That's consistent with the indicative figure he gave in the interview with CNBC:
If we buy a stock, we usually try and buy a given percentage of the volume that day. [...] I think if we buy more than 20% a day, we're probably affecting the price too much, and on the other hand, I like to buy as much as I can get. So I sort of hit on that 15% or 20% a day.
Berkshire Hathaway achieved an average price of $79.37 on those purchases. The rate of accumulation suggests that figure is lower than the average price paid on the previous 50.5 million shares (which constitute the bulk of his Phillips 66 position).
As far as a rationale, Buffett kept things simple:
Phillips 66 has no upstream production -- that probably accounts for the bulk of the value of an Exxon. On the other hand, Phillips 66 is not a pure refiner: They've got a big Chemicals division, a midstream business. We're not buying it as a refiner, we're certainly not buying it as an integrated oil company; we're buying because we like the company and we like the management very much. Ever since Greg Garland has taken over after it spun out of ConocoPhillips, he's done a terrific job.
Investors still have the opportunity to invest in Phillips 66 on better terms than Warren Buffett (or equally attractive, at the very least). That's the kind of opportunity that patient, value-driven investors ought to be looking at closely.