Berkshire Hathaway (NYSE:BRK.A), (NYSE:BRK.B) purchased over 704K additional shares of Phillips 66 (NYSE:PSX) this week, bringing its total to 79.5M shares, equal to roughly 15% of the float. By increasing its stake in the midst of a challenging low-margin environment for refiners, BRK was able to buy at a relatively attractive price point of $77.45, less than 10% above PSX's 52-week low, at a cash flow yield above 10%. We discuss how the investment fits with Warren Buffett's philosophy to help you form an opinion on the outlook for PSX.
Warren Buffett likes to purchase quality businesses with stable long-term prospects and shareholder-friendly management teams at reasonable prices. From a business quality standpoint, the investment makes sense, as PSX is one of the best-positioned companies in the independent refining space, in our view. PSX's midcontinent refineries have access to low cost crude feedstocks, and the company continues to benefit from higher production levels of cheap crude flowing from the US and Canada. In a commoditized business such as refining, a lower cost structure is a crucial advantage. But PSX's large transportation business is what sets it apart from rivals in the refining space. Thanks to its pipeline assets, PSX benefits more than most refiners from higher domestic crude oil production and export demand. Over the past five years, PSX's ROIC have averaged in the mid-teens, with relatively low volatility. This exceeds our cost of capital estimate, and suggests the presence of an economic moat.
