Will Phillips 66 Outperform?

Phillips 66 announced fourth quarter ended December 31, 2015 adjusted earnings of $710 million or $1.31 per adjusted share, down 57 percent sequentially from adjusted earnings of $1.65 billion or $3.02 per adjusted share in third quarter of 2015 and down 22 percent year-over-year from $913 million or $1.63 per adjusted share in fourth quarter of 2014. Moreover, the company delivered $1.5 billion of operating cash flows during the quarter.

Phillips strategically returned $2.7 billion of consolidated capital to the key stakeholders through planned dividend distributions and share buybacks.
Phillips has distributed a total cash of $704 million for the quarter and in line with its continued commitment to deliver improved shareholder returns.

Smart moves

The downstream energy provider has uniquely managed and controlled the non-core capital and general expenditures to successfully emerge from the continuing global slowdown in key commodities demand and pricing environment which has also encouraged it to deliver outstanding shareholder returns.

The sequential and year-over-year reduction in bottom line is mainly related to weaker international commodity demand and pricing scenario coupled with the rising refining expenditures which are believed to continue in the near future as well.

Phillips has concluded the fourth quarter with $3.1 billion of cash balance as against $4.8 billion of cash balance in the prior quarter. The continued reduction in cash balance over the quarters is due to DCP equity addition, shareholder distributions, working capital expenditures and investments.

Going forward, the downstream energy company is focused on minimizing the impact of ongoing weaker international commodity demand and pricing scenario by controlling the non-strategic capital expenses, growing free cash flows while distributing improved returns to the key stakeholders.

Phillips has uniquely optimized its capital structure with a keen focus on enhancing equity and cash, cash equivalents while reducing total debt and delivering debt-to-capital ratio in the range of 20% to 30% which is again in line with its continued commitment to sustain a healthy cash position while delivering attractive investor returns.

What gives?    

The downstream energy company illustrated continued sequential decline in its midstream adjusted earnings to $42 million in fourth quarter of 2015 from $91 million in the prior quarter, primarily linked to the continuing weaker international commodity demand and pricing environment. The refining segment for the quarter recorded a significant 94 percent utilization rate and achieved 85 percent of clean product delivery. The decline in earnings for refining segment is attributable to weaker realized margins owing to a 35 percent fall in worldwide market cracks as against third quarter.

The capital structure optimization strategy and focused approach towards improving the key segment results by Phillips is believed to drive sustainable long-term profitability for the company while delivering improved stockholder returns.

Phillips realized and reported global refining margins for fourth quarter of 2015 at $9.41 per BBL compared to average market refining margin of $12.77 per BBL. This decline in margins is related to the presently depressed global commodity demand pricing environment.

The board of directors at Phillips 66 recently announced a quarterly dividend of $0.56 per share on its common stock and payable on March 1, 2016, to the key stakeholders as of Feb. 16, 2016.

The downstream energy company is focused on delivering outstanding shareholder returns despite tough global operating environment by strategically allocating the capital resources and minimizing non-core expenses.

TheStreet Ratings team rates Phillips 66 as a “Buy” with a ratings score of ‘B’ and primarily driven by several of the company’s key strengths which are believed to outweigh any of its weaknesses and thus, allowing the investors to record profitability. The company's major strengths are observed in several areas, like its logical valuation levels, impressive operating cash flows, notable price performance of the stock, usually robust financial position with reasonably lower debt levels and significant return on equity. Contrastingly, the only weakness is the company’s weak profit margins.

The consensus estimate among 17 polled investment analysts evaluating Phillips 66 suggests that the company would outperform the market. This consensus estimate is maintained since the investment analyst’s sentiments got better on May 18, 2012. The earlier consensus estimate suggested investors to hold their position in the company.

A majority of the key investment analysts are extremely positive about the growth prospects of Phillips considering the company’s significant expansion potential being supported by a strong balance sheet.


Overall, the investors are advised to “Buy” equity in Phillips 66 considering the company’s logical valuation level with trailing P/E and forward P/E ratios of 9.87 and 10.25 respectively which is also comparable to the industry’s average P/E of 13.05. The PEG ratio of 1.90 signifies healthy company growth and comparable to the industry’s growth average of 0.73. The profit margin of 4.96% seems satisfactory. However, Phillips needs to optimize its debt-burdened balance sheet with significant total debt of $8.95 billion against weaker total cash position of $4.82 billion only, restricting the company to continue with its daily operations profitably.
Published on Mar 29, 2016
By Yaggyaseni Mittra

Copyrighted 2020. Content published with author's permission.

Posted in ...