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An Overview of Phillips 66: A Fully Integrated Downstream Player

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Part 5
An Overview of Phillips 66: A Fully Integrated Downstream Player PART 5 OF 9

Phillips 66’s Leverage: Net Debt to Earnings Is Trending Lower

Phillips 66’s leverage compared to peers

Until now we’ve discussed Phillips 66’s (PSX) stock performance, analyst ratings, and business segments. In this part, we’ll examine the leverage of the company.

Phillips 66’s net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio stood at 0.69x in 3Q15. This is higher than the average 0.55x ratio of its peers Marathon Petroleum (MPC), Valero Energy (VLO), and Tesoro (TSO). The rise in the ratio is due to PSX’s capex activities and shareholder returns. The net debt-to-EBITDA ratio shows a company’s leverage as a multiple of its earnings.

Phillips 66’s Leverage: Net Debt to Earnings Is Trending Lower

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In 3Q15, Phillips 66’s total debt-to-capital ratio stood at 27.1%. This ratio is lower than the peer average of 30.6% of MPC, TSO, and VLO. The debt-to-capital ratio shows a company’s leverage position and capital structure.

Phillips 66’s net debt-to-EBITDA trend

Phillips 66’s (PSX) net debt-to-EBITDA ratio rose from 0.06x in 3Q13 to 0.69x in 3Q15. Before analyzing the rise in the ratio, let’s understand the net debt trend.

PSX’s net debt rose to $4.1 billion from 3Q13 to 3Q15. This was due to a sharp rise in net debt in 3Q14 due to a steep fall in cash levels. In 3Q14, PSX saw a rise in capex activities and share buybacks. Further, in 4Q14, net debt inched higher due to a $2.4 billion rise in total debt. The rise in debt offset the rise in cash.

After that, PSX saw marginal movement in its cash and total debt levels. In 3Q15, PSX’s total debt and cash stood at $8.9 billion and $4.8 billion, respectively.

EBITDA rose from 3Q13 to 3Q15 on account of higher earnings in PSX’s refining segment. However, the steep rise in net debt from 3Q13 to 3Q14 led the company’s net debt-to-EBITDA ratio to rise from 0.06x to 0.79x. But as earnings swelled, the ratio fell to 0.69x in 3Q15. Even though PSX’s net debt-to-EBITDA is higher than its peers’, the fall in the ratio from 3Q14 to 3Q15 is favorable for the company.

For exposure to downstream sector stocks, you can consider the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), which has ~19% exposure to the sector. The ETF also has PSX, MPC, TSO, and VLO in its portfolio.

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