Phillips 66 Shrinks Warren Buffett’s Dominance With Huge Stock Buyback

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As the markets and investors await the release of the top holdings of America’s top fund managers and investment gurus, we have already seen news that one of the large holdings of Berkshire Hathaway Inc. (NYSE: BRK-A) has been lowered. This matters because the stake that will be reported in the 13F-HR filing for Berkshire Hathaway released this week will not reflect the change.

Phillips 66 Co. (NYSE: PSX) has announced in a press release that the company agreed to repurchase 35 million shares of its own common stock from a wholly owned subsidiary of Berkshire Hathaway. This $3.3 billion transaction went off at a price of $93.725 per share, while the current share price is near $92.25, after considering more than a 1.6% drop on the news.

Before Phillips 66 investors panic here, it is important to understand that privately negotiated stock repurchases historically are not that uncommon. In fact, it can make sense for a company to buy a larger block of shares from a large stakeholder because it might allow the company to buy without driving up the price with open market transactions. On the other hand, the large stakeholder can realize a set price for a large block of shares without the fear of worrying if the market figures out they are in fact selling shares.

At the closing of this transaction, Phillips 66 will have a total of 466.5 million shares outstanding, and Berkshire Hathaway will still hold 45.7 million shares. That’s a stake of 9.8% rather than the 15.9% stake seen as of September 30, 2017.

Many investors might worry that if Warren Buffett exits a company then it means he and his team no longer value the company in the same light. That’s impossible to point as a “Yes/No” factor today, but that is not what Buffett’s comments indicate as the move points to lower regulatory requirements with such a large stake. Buffett even suggested that Berkshire Hathaway plans to be a very large stockholder of Phillips 66 for quite some time ahead.

24/7 Wall St. has tracked the expanded holdings of Buffett and Berkshire Hathaway in Phillips 66 for some time. In 2016 we saw that Team Buffett added a million shares of Phillips 66 at prices of $77.08 to $77.39. And in mid-2015, the Phillips 66 stake was listed as follows:

Phillips 66 was an increased stake to 78.782 million shares as of June 30, 2016. As of March 31, 2016, it was a 75.55 million share stake and this had risen steadily. This stake previously had been classified as an elimination in 2015 but was then shown as a stake again after Buffett got the stake classified with the SEC as confidential. Even early in 2016, we pondered whether Buffett’s additional share purchases of Phillips 66 were calling a bottom — and that was with shares down under $80.

Buffett said of the transaction:

Phillips 66 is a great company with a diversified downstream portfolio and a strong management team. This transaction was solely motivated by our desire to eliminate the regulatory requirements that come with ownership levels above 10 percent. We remain one of Phillips 66’s largest shareholders and plan to continue to hold the stock for the long term.

Greg Garland, board chair and chief executive of Phillips 66, said:

We are excited to have this opportunity to return capital to our shareholders in such a meaningful way. This transaction benefits all of our shareholders, as it is immediately accretive to earnings per share and positive for valuation. While this highlights our dedication to shareholder distributions, our strategy remains unchanged. We are committed to running our assets safely and reliably, growing our Midstream and Chemicals businesses, enhancing our Refining and Marketing returns, and rewarding our shareholders through a secure, competitive and growing dividend along with continued share repurchases.

Phillips 66 shares were last seen trading down 1.7% at $92.15 on Wednesday. It has a 52-week range of $75.14 to $107.47, and the consensus analyst target price is $109.53.