Phillips 66: Go Long for Big Gains

Phillips 66 (PSX) reported its 4th quarter and full year 2015 results on 29th January. Its fourth quarter earnings were $ 650 million, compared with the earnings of $ 1,578 million in the preceding quarter. Adjusted earnings, excluding special items of $ 60 million, were $ 710 million. The company generated $ 1.5 billion in cash from operations during the quarter. The refining segment achieved 94 % utilization and a record 85 % clean product yield. Earnings for the full year were $ 4.2 billion while the operating cash flow for the same period was $ 5.7 billion.

Segment wise performance:

The company’s Midstream segment delivered adjusted earnings of $ 42 million in the fourth quarter, a decrease of $49 million compared to the third quarter.
In this segment, only the Transportation business could generate positive adjusted earnings of $ 78 million compared to $ 77 million earned in the previous quarter. On the other hand, the NGL and DCP Midstream businesses had negative adjusted earnings. NGL adjusted losses were $ 2 million for the fourth quarter, a $ 34 million decline from the previous quarter. That was due to the timing of adjustments related to the tax extenders bill, signed in December, as well as additional costs associated with the Sweeny Hub. The DCP Midstream business had an adjusted loss of $ 34 million, compared with an $ 18 million adjusted loss in the prior quarter. This was primarily due to lower margins in natural gas and natural gas liquids and also due to the impact of lower commodity prices.

The Chemicals segment delivered $ 962 million in earnings prices for the full year amid declining commodity. The adjusted earnings from this segment were $ 182 million in the fourth quarter, compared with adjusted earnings of $ 272 million in the third quarter. Out of this, the Olefins and Polyolefins business contributed $ 181 million, a decrease of $ 80 million compared with the prior quarter. Specialties, Aromatics and Styrenics business contributed $9 million of adjusted earnings in the fourth quarter, a decrease of $8 million from the prior quarter primarily due to lower earnings at CPChem's SA&S equity affiliates as a result of planned turnarounds and lower margins. The other businesses that come u8nder the purview of the Chemicals segment, couldn’t deliver adjusted profits and ended up with an $ 8 million loss compared to a $ 6 million loss in the preceding quarter.

The Marketing and Specialties segment delivered fourth-quarter adjusted earnings of $ 227 million, compared with $ 344 million in the third quarter. Under this segment, the Marketing and Other business had adjusted earnings of $ 198 million which implies a decrease of $ 93 million from the prior quarter. The decline came primarily due to less favourable market conditions relative to the third quarter. The Specialties business delivered adjusted earnings of $ 29 million during the fourth quarter, a $ 24 million quarter-on-quarter decline largely due to reduced base oil margins, as well as lower finished lubricants margins and volumes.

The Refining Segment:

The full year earnings from the refining segment were $ 2.6 billion for the full year. In the fourth quarter, adjusted earnings from the segment were $ 376 million in the fourth quarter, compared with $ 1,052 million in the third quarter. This decline in adjusted earnings was primarily because of lower realized margins due to a 35 % decline in global market cracks compared to the third quarter. The quarter on quarter drop in gasoline market cracks was much larger than that in the case of distillate cracks for the same period. Fourth-quarter gasoline market cracks dropped to $ 12.72 per barrel, compared with $ 21.44 per barrel during the third quarter. Over the same period, the distillate cracks declined from $ 15.67 per barrel to $ 12.86 per barrel.

Thus, the refining segment did show some weakness despite the company beating the consensus forecasts. This was largely a result of much lower crude reading margins, falling to just $ 9.41 per barrel as crack spreads fell 35 %. The more severe declines were observed in the refineries located in the Central Corridor, the Western US region and along the Gulf Coast. On the other hand, the refineries located in the Atlantic Basin suffered much less possibly due to a lower WTI/Brent spread.

However, the company did increase its market capture from 72 % in the third quarter to 74 % in the fourth quarter. A solid performance in terms of refining utilization as well as clean product yield was also seen. Phillips 66's refining utilization and worldwide clean product yield were 94 % and 85 %, respectively, in the fourth quarter. Turnaround costs for the fourth quarter were $ 130 million pre-tax, primarily relating to the Western/Pacific Region.

The advantage to Phillips 66 is that it is not a producer of oil or natural gas. It is a customer of these commodities which are selling cheap right now and look likely to remain so for a foreseeable future. Hence, it will not be hurt by the oil downturn to the extent that the drilling and producing companies like ExxonMobil and ConocoPhillips have been. Phillips 66 will actually benefit from low commodity prices as they are raw materials for its business.

Conclusion

With strong cash generating potential displayed, the fourth quarter of Phillips 66 could be said to be in favour of its holders. The outlook for the company remains strong as it has much less exposure to commodity price swings than the producer companies. Further, its refining margins are bound to increase as crack spreads are returning to normal levels along the Gulf Coast in the current quarter. Thus, the company is well set for shareholder value creation for the long term.
Published on Feb 25, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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