Phillips 66: Should You Buy This Refiner?

Phillips 66 (PSX) announced second quarter ended June 30, 2016 adjusted net income of $499 million or $0.94 per share, up 39 percent sequentially from $360 million or $0.67 per share in first quarter of 2016 but, down 50 percent year-over-year from $1.0 billion or $1.83 per share in second quarter of 2015.

Phillips 66 registered a record 100% utilization rate for second quarter of 2016 and delivered solid adjusted refining earnings of $152 million as against $86 million of adjusted refining earnings and a net utilization rate of 94 percent during the first quarter of 2016 and primarily driven by enhanced volumes.

The global energy producing and logistics company reported continued year-over-year bottom line contraction mainly due to the ongoing weaker global commodity demand and pricing environment coupled with the rising energy exploration expenditures, negatively impacting the company’s margins.

A closer look at the operations  

Phillips 66 seems keen on controlling both core and non-core expenses to survive in the ongoing tough global commodity demand and pricing environment while strategically growing its sequential adjusted earnings for second quarter of 2016 and mainly contributed by the earnings contribution from the key growth segments in descending order starting Refining, Chemicals, Marketing & Specialties and Corporate & Other segments each contributing $66 million, $34 million, $24 million and $16 million respectively, somewhat offset by $1 million adjusted loss witnessed for the Midstream segment.

The Midstream segment earnings loss was primarily driven by the expenses linked to the planned transportation maintenance, NGL affected by project expenditures and unfavorable seasonal storage timings.
Phillips 66: Should You Buy This Refiner?
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However, DCP Midstream gained from improved volumes, self-help efforts and growing commodity prices coupled with 16% strategic expansion in PSXP deliveries to the company.

For the refining segment in second quarter of 2016, Phillips 66 has attractively achieved 100% of core crude utilization, 84% clean product delivery and $7.13 per billion barrels of superior realized margin. In addition, Phillips 66 has achieved attractive realized refining margin of 7.13 compared to the general market margin of 13.84 and thus, recorded 52% of market capture rate at an average market crude price of $46.17/BBL.

The ongoing focus of Phillips 66 on controlling non-core expenses while generating attractive midstream results is expected to soon allow the company to reach closer to the average industrial refining margins while enabling it to offer attractive shareholder returns in form of dividends and strategic share repurchases.

Facing weakness  

Phillips 66 reported continued year-over-year decline in its total adjusted earnings for the second quarter of 2016 mainly due to weaker segment performances across the Midstream, Chemicals and Refining segments somewhat offset by healthier performances across the Marketing & Specialties and Corporate & Other growth segments. The Midstream segment also reported continued year-over-year decline in second quarter of 2016 adjusted earnings mainly due to the poor NGL bottom line performance somewhat offset by superior DCP Midstream segment earnings performance.

Importantly, Phillips 66, Sunoco Logistics Partners L.P. and L.P. together have declared strategic completion of key project-based financing of the Energy Transfer Crude Oil Pipeline (ETCOP) and Dakota Access Pipeline (DAPL) projects that together is referred to as the “Bakken Pipeline”. This strategic $2.5 billion of project financing facility is believed to provide notably all the outstanding capital required to successfully complete the key projects.

The well-planned project financing facility developed by Phillips 66 is expected to significantly diversify the project completion risk among its partners while allowing the company to preserve the much-needed cash required for making future growth investments and offering attractive shareholder returns.


Overall, the investors are advised to “Hold” their position in Phillips 66 considering the company’s significant long-term growth prospects but, currently weaker financial position with notable total debt of $8.86 billion against weaker total cash position of $2.23 billion only, restricting the company to continue with its daily operations profitably. The profit margin of 4.25% seems satisfactory. However, the PEG ratio of -119.15 is misguiding and indicate no growth but decline.
Published on Sep 23, 2016
By Yaggyaseni Mittra

Copyrighted 2020. Content published with author's permission.

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