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Berkshire Swaps $1.4 Billion in Phillips 66 Stock in Deal

Berkshire Hathaway Inc. (BRK/A) will swap about $1.4 billion in shares of Phillips 66 (PSX) for full ownership of the energy firm’s pipeline-services business as billionaire Warren Buffett expands his bet on oil transportation.

Berkshire will exchange about 19 million shares, Phillips 66 said in a regulatory filing yesterday, when the energy company closed at $74.72 in New York. The exact number of shares Berkshire will pay for Phillips Specialty Products Inc. will be determined when the deal is completed, Phillips 66 said.

A U.S. drilling boom has expanded crude oil and natural gas production, prompting pipeline operators to boost capacity. Polymer-based additives, the focus of Phillips’ business unit, are used to move products through the pipe more efficiently by reducing drag. They can increase capacity at a time when approvals for new pipelines come slowly.

“Berkshire is betting on this stuff because there are a lot of liquids pipelines in the United States operating at capacity,” Richard Kuprewicz, president of Accufacts Inc., a Redmond, Washington-based pipeline consulting firm, said in a phone interview. “This is a way to get capacity up quickly on pipelines that need a boost without having to spend a lot of money or time on permits.”

Photographer: Daniel Acker/Bloomberg

Berkshire Hathaway Inc. held more than 27 million shares in Houston-based Phillips 66 at the end of September, according to regulatory filings. Close

Berkshire Hathaway Inc. held more than 27 million shares in Houston-based Phillips 66... Read More

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Photographer: Daniel Acker/Bloomberg

Berkshire Hathaway Inc. held more than 27 million shares in Houston-based Phillips 66 at the end of September, according to regulatory filings.

Berkshire has already benefited from the expansion of U.S. energy production. Its Burlington Northern Santa Fe railroad has has been boosting shipments of crude oil and investing in infrastructure to haul more petroleum to refineries. The company also owns pipelines through MidAmerican Energy Holdings Co.

Exxon Mobil

Buffett and his deputies also have invested in other energy companies this year. Berkshire said in November that it had accumulated 40.1 million shares of Exxon Mobil Corp., valued at more than $4 billion. The money managers also added holdings in energy producers National Oilwell Varco Inc. and Suncor Energy Inc.

Divesting the pipeline-services business helps Phillips 66 recognize value for a unit investors may have ignored since the company’s spinoff of ConocoPhillips in 2012, Cory Garcia, a Houston-based analyst with Raymond James & Associates Inc., said in a phone interview.

“It’s a nice, accretive transaction,” he said.

Phillips 66 climbed 3.2 percent to $77.13 at 4:02 p.m., extending its gain to 45 percent this year. Berkshire’s Class A shares rose 0.5 percent to $177,900.

‘Major Mistake’

The companies said in a statement that they expect to complete the deal in the first half of 2014 after regulatory reviews. Most of the unit’s employees work in Bryan, Texas, along with some researchers in Oklahoma and sales teams in Belgium and Russia, Dean Acosta, a spokesman for Phillips 66, said in a phone interview.

James Hambrick, chief executive officer of Berkshire’s Lubrizol unit, will oversee the pipeline-services business once the deal is complete, according to a statement yesterday. Hambrick has been expanding Lubrizol through acquisitions since selling the chemical maker to Buffett in 2011.

Part of Berkshire’s holding in Phillips 66 derives from Buffett’s wager on ConocoPhillips when oil and gas prices were near their peak in 2008. As prices plunged later that year, Berkshire took a $1.9 billion charge on the investment, contributing to its worst quarterly loss in at least two decades. Buffett called the bet a “major mistake” in a 2009 letter to shareholders.

Train Accident

At least some of Berkshire’s stake in Phillips 66 was accumulated by Ted Weschler or Todd Combs, Buffett’s backup stock pickers, the billionaire said on Bloomberg Television last year. Berkshire held more than 27 million shares in Houston-based Phillips 66 at the end of September, according to a regulatory filing.

Buffett didn’t respond to an e-mailed request, sent to an assistant, for comment about the deal.

A Burlington Northern train carrying oil erupted into flames yesterday after colliding with another train that had derailed near Casselton, North Dakota. Thousands of residents in the state were urged to flee possibly toxic fumes from the fire.

To contact the reporters on this story: Bradley Olson in Houston at bradleyolson@bloomberg.net; Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; Dan Kraut at dkraut2@bloomberg.net

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