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Buffett's Berkshire Plays Both Sides of Phillips 66 Breakup

Tickers in this article: BRK.A BRK.B PSX
Updated from 9:23 a.m. ET with Robert Willens comment, opening share prices and additional information throughout

NEW YORK ( TheStreet) -- Warren Buffett's Berkshire Hathaway is buying part of Phillips 66 with part of Phillips 66.

Yes, folks that's not a typo.

The Oracle of Omaha is using a piece of his over 4.5% holding in Phillips 66 shares to buy the company's Phillips Specialty Products unit, which optimizes the flow of oil and gas through pipelines. For Buffett, the deal appears to be another bet on the logistics surrounding a surge in onshore oil and gas drilling across the U.S.

Berkshire's biggest-ever acquisition, its over $30 billion takeover of railroad Burlington Northern Santa Fe , also is profiting from an energy boom within the continental United States. BNSF railcars have been among the biggest transporters of oil and gas in the U.S. given the still-limited pipeline access to many promising shale basins. At Berkshire's annual shareholder meeting, Buffett said Berkshire Hathaway has been lucky that so much oil has been found near BNSF track.

Buying Phillips Specialty Products Inc. (PSPI) is another oil transportation bet, but this time with pipelines. The business appears to concentrate on improving the performance of existing pipelines, obviously with the end-goal of increasing transport.

What is most interesting in the deal, announced after the market close on Monday, however, is how Buffett will be acquiring PSPI from Phillips 66.

Instead of dipping into Berkshire Hathaway's war-chest of cash, the insurance conglomerate will simply be handing over approximately 19 million of its shares in Phillips 66, worth about $1.4 billion as of Monday's close. At current share prices, that also amounts to about 70% of Berkshire's 4.53% stake in the midstream energy giant.

"In exchange for the share capital of the wholly owned subsidiary, Phillips 66 will receive shares of Phillips 66 common stock currently held by Berkshire Hathaway. The specific number of shares will be determined by the share price at deal closing," Phillips 66 said in a press release announcing the deal.

"I have long been impressed by the strength of the Phillips 66 business portfolio," Warren E. Buffett, said of the deal. "The flow improver business is a high-quality business with consistently strong financial performance, and it will fit well within Berkshire Hathaway," he added. Berkshire plans to have James L. Hambrick, CEO of Lubrizol oversee the unit's strategic direction.

Mario Gabelli, head of Gabelli Funds  said on Twitter that the financial terms of Berkshire's PSPI acquisition from Phillips 66 will look like a so-called cash rich spin-off.

Because Berkshire will be forking over its shares for PSPI instead of selling them on the open market, it may minimize taxable capital gains on the firm's Phillips 66 holding. Phillips 66 may also garner a tax benefit from the deal because it will effectively retire stock using PSPI's pre-tax value.