Phillips 66 (NYSE:PSX): Here’s Why Warren Buffett is Buying This Oil Stock

Dropping-Oil-PricesWarren Buffett is banking on a positive oil price forecast to lend some relief from a bad year in auto insurance investments.

A recent $4.5 billion dollar purchase by Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) of a large stake in oil major Phillips 66 (NYSE:PSX) suggests that the legendary billionaire investor sees an oil price rebound on the horizon. (Source: Forbes, last accessed September 2, 2015.) His auto insurance arm, Geico Insurance, has experienced profound financial woes this year, and Buffett is looking to make smart moves to offset this loss.

Financial markets are not without a sense of irony, as a low oil price forecast was one of the main drivers of Geico’s loss this year. As the oil price collapse translated into lower gasoline costs, more and more American drivers hit the road to take advantage of cheap fuel and caused higher-than-average numbers of accidents and subsequent insurance claims.

Just how bad are we talking about? Geico’s underwriting profit nose dived by 87% this year to $53.0 million in the second quarter, as claims rose by 21% to $4.0 billion. (Source: The Street, last accessed September 2, 2015.) Warren Buffett announced a $38.0 million loss across his insurance holdings, compared to a $411 million profit in the same period in 2014.

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If and when the oil price forecast starts heading north, companies such as Phillips 66 will see their stock soar. Playing the market right will provide an easy way for Buffett to once again turn lemons into lemonade, as he often does.

But this also ties in Buffett’s business empire in an interesting way.

Phillips 66 is slowly becoming one of the most important customers of Berkshire subsidiary Burlington Northern Santa Fe. (Source: Forbes, last accessed September 2, 2015.) Surging U.S. oil production in recent years overwhelmed American pipeline capacity and compelled producers such as Phillips to send their crude oil by rail. BNSF quickly became the largest crude-by-rail company.

Both are now owned by Buffett, bringing their complimentary business models full-circle.

This isn’t the first time the billionaire investor has sunk a considerable amount of money into the energy market. In 2008, prior to the stock market crash, Buffett purchased over $7.0 billion in ConocoPhillips (NYSE:COP) stocks, as well as $3.7 billion in Exxon Mobil stocks. (Source: Financial Post, last accessed September 2, 2015.)

But this time it’s different.

Buffett appears to be investing in energy-related infrastructure in addition to oil production, which diversifies his position considerably.

Phillips 66 isn’t strictly just a producer, and contains many non-refining businesses such as its midstream unit. These will benefit considerably if and when oil prices rally. The company’s strong assets outside of already-profitable refining are what make this investment the type Buffett is known for. (Source: The Wall Street Journal, last accessed September 2, 2015.)

All in all, this latest investment is not only an indicator of Warren Buffett believing in a positive oil price forecast, but is also a well-thought out strategic step which combines several of his business holdings.

Also Read: Warren Buffett Dumps National Oilwell Varco, Inc. (NYSE:NOV) Oil Stocks