Phillips 66: a Good or a Dead Investment?

Phillips 66 (PSX) recently delivered $1.5 billion of adjusted operating cash flows. Investments and capital spending added to $1.0 billion, mainly enabling the strategic execution of midstream expansion efforts of the company.

The energy exploration and Logistics Company reported significant year-over-year and sequential bottom line growth, primarily driven by solid results from marketing and refining segments of the company which were allowed by improved utilization of the refining capacity and growing product margins.

Phillips 66 is successfully growing year-over-year total adjusted earnings for the third quarter of 2015, including healthy growths across the company’s refining, marketing and specialties segments.

A closer look

Despite tough global commodity demand and pricing environment, Phillips 66 has managed to deliver notable cash and cash equivalents of $4.8 billion in the third quarter of 2015, compared to $5.1 billion in the second quarter of 2015.
Further, Phillips 66 declared year-till-date annualized adjusted return on capital employed (ROCE) of 15 percent.

The impressive development in the company’s bottom line and cash flows for the quarter signifies the robust growth strategy being implemented by the Phillips 66, which is expected to drive sustainable long-term company growth.

Phillips 66 strategically returned $673 million to the key stakeholders in the quarter, comprising of $300 million of dividend payments and the buyback of 4.7 million shares of its common stock for approximately $373 million. Ever since July 2012, Phillips 66 has bought back 88 million shares for nearly $6 billion and grew its quarterly dividend by about 180 percent to approximately $0.56 per share. The company concluded the quarter with nearly 533 million common shares outstanding. In addition, Phillips 66 lately declared a $2 billion expansion to its planned share buyback program, leading to about $3 billion of outstanding capacity under the company’s present authorization.

Making the right moves

Phillips 66 has managed to somewhat grow year-over-year equity for the quarter by successfully controlling the expanding debt levels over the years. The company’s capital budget program for 2015 is mainly focused on developing key midstream expansion projects. Going forward, Phillips 66 has uniquely approved $3.9 billion of 2016 capital budget program that also includes Phillips 66 Partners. Nearly two-thirds of this strategic 2016 capital budget program is assigned towards the growth capital, primarily linked to key Midstream projects, coupled with the Refining projects to enhance the productivity of the major products and reduce feedstock expenses.

The excellently managed capital development and allocation program of Phillips 66 have enabled it to control the year-over-year rising debt, enhance liquidity while strategically expanding the share repurchase and in line with its continued commitment to deliver outstanding shareholder returns.

The significantly large-sized midstream and chemical operations of Phillips 66 that usually deliver strong returns, impressive bottom line growth and notably outshine its peers are expected to continue to display solid performance with the company planning to put in heavy investments into the strategic chemicals and midstream segments that would further lower the importance of the refining segment.

The Board of Directors at Phillips 66 has announced a quarterly dividend of $0.56 per share on the company’s common stock payable on Dec. 1, 2015, to the key shareholders as of Nov. 13, 2015.

Phillips 66 seems an excellent long-term buy for the investors, given the company’s solid base of strategic operations which are believed to outperform most of the company peers. Phillips 66 is also an attractive destination for equity investments, delivering notable long-term shareholder returns.

TheStreet Ratings team rates Phillips 66 as a “Buy” with a ratings score of A and primarily driven by several positive factors which are believed to significantly benefit the long-term investors. The company's strengths are observed in several areas, like its impressive stock price performance, solid earnings per share growth, expanding net income, a robust financial position with reasonably lower debt levels and strong return on equity. Contrastingly, the only weakness is the company’s weaker profit margins.

The consensus estimate among 18 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 66, considering the company’s robust financial performance which is expected to outshine any of its peers.

Conclusion

Overall, the investors are advised to “Buy” equity in Phillips 66 looking at logical company valuations with trailing P/E and forward P/E ratios of 10.76 and 12.89 respectively, depicting reasonably-priced stock and comparable to the industry’s average P/E of 14.64. The PEG ratio of 1.95 indicates healthy company growth and comparable to the industry’s growth average of 0.88. The profit margin of 4.81% seems satisfactory. Moreover, Phillips 66 has a strong financial position with significant total cash of $4.82 billion, encouraging the company to make future growth investments.
Published on Apr 11, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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