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Warren Buffett goes big on North American energy

A handout photo of a Phillips 66 gas station.

ConocoPhillips

Anything associated with Warren Buffett attracts investor attention. But his deal with Phillips 66 drove the shares up 3 per cent on Tuesday, despite the fact that Mr. Buffett, through Berkshire Hathaway Inc., sold the energy company's shares as opposed to buying them.

The deal saw Berkshire Hathaway buy Phillips 66's pipeline services unit for $1.4-billion (U.S.) in stock – as in, Berkshire surrenders its holdings in Phillips 66 stock rather than pay cash for the asset. As Ben Levisohn at Barron's points out, the structure of the deal suggests that Mr. Buffett believes the energy company's stock could be a tad pricey after a 45 per cent run-up this year.

So why the investor interest? Possibly, it has nothing to do with Mr. Buffett but rather Phillips 66: Investors often approve when companies streamline their operations. And in this case, Phillips 66 sheds an asset that hadn't been fully valued by investors, at an attractive price.

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But Mr. Buffett shouldn't be ignored here, either. Clearly, he is developing a big bet on North American energy. He has made a $4-billion (U.S.) bet on Exxon Mobil Corp., along with smaller forays into the likes of Canada's Suncor Energy Inc. More importantly, he is now signalling that he sees value in energy transportation. His massive investment in Burlington Northern Santa Fe has tapped into transporting crude oil by rail.

Now, with the Phillips 66 deal, he gains a pipeline – a fact that hasn't been lost on investors as they survey the landscape. The Dow Jones U.S. Pipelines index rose 0.7 per cent on Tuesday. And El Paso Pipeline Partners LP, in particular, rose 1.9 per cent. Among Canadian stocks, TransCanada Corp. and Pembina Pipeline Corp. rose 0.2 per cent each.

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