Phillips 66: Will It Beat Earnings?
Phillips 66 (PSX) reported a good overall result for its second quarter of this year. It reported adjusted earnings of more than $1 billion for the second quarter while almost $2 billion for the first half of 2015. The second quarter earnings were far better in comparison with both: the first quarter 2015 and the second half 2014.
In fact, the whole first half could be said to be a testimony to Phillips 66’s fundamental strength that lies in its highly diversified business portfolio.
Making the right moves
Phillips 66 had also beaten the consensus estimates of various analysts in the last reported quarter. For example, the per share adjusted earnings it posted for the second quarter was $1.83, while Zacks consensus estimate was $1.81 per share. Also, the EPS was far better than last year when it came out to be $1.51 per share. All this was attributed to the robust performance in the Marketing & Specialties and Refining segments of the company while the Chemical and Midstream segments fell behind a year ago performance.
The fall in revenue from $46.3 billion to $29.1 billion was also due to poor show by the Chemical and Midstream segments in the second quarter. A fall was, however, expected by Zacks analysts as they estimated $25.3 billion revenues for Phillips 66. Still the company beat the estimate by a big margin and that should definitely retain the confidence.
In addition to its operational efficiency and adaptability, it also has a great balance sheet. At the end of the second quarter, the company had $5.1 billion in cash and cash equivalent against a total debt of about $9 billion. That means a net debt of about $4 billion. And when we bring in the $1.4 billion of cash generated in the second quarter alone, we realise how relieved is Phillips 66 on the debt obligation front.
The fact that Phillips 66 is not involved in any upstream operations gives it a rare advantage which most energy companies don’t have in the current time of low crude oil prices. This is why if we look at the broader energy sector, or the Energy Select Sector SPDR ETF (XLE), we find that PSX has outperformed the XLE so far this year. XLE has given a -16 % return this year while PSX has given a +16.5 % return.
Because of being a Midstream and Downstream player, Phillips 66 has rather benefited from the on-going crude oil crash. As a result of low crude prices the input costs of players like Phillips 66 moves favorably and their margins widen especially at the downstream segments like Refining and Marketing where prices remain relatively stable.
Phillips 66 is going to announce its result for the third quarter soon on October 30. Analysts are all expecting a result better than the second quarter. Market Realist estimates that the revenue will be about 3% higher than the previous quarter but 29% lower than last year. Wall Street Analysts have given a mean estimate of $2.07 earnings per share, while Market Realist has given that of $2.20 per share to Phillips 66 for the third quarter.
The lower cost of crude oil is a general advantage for downstream companies. Therefore, beating the earnings estimates like above shouldn’t surprise the industry. And since there has not been upside in the stock of Phillips 66 since the announcement of Q2 results, its potential after good Q3 results is strong.