Phillips 66’s Refining Margin Indicators
Phillips 66’s refining segment
Phillips 66 (PSX) has four business segments: refining, midstream, chemicals, and marketing. In this part, we’ll discuss Phillips 66’s refining segment, which contributes ~64% to its adjusted net income.
PSX operates through its 14 refineries, located primarily in the United States and Europe, with a total refining capacity of 2.2 MMbpd (million barrels per day). PSX’s peers Marathon Petroleum (MPC), Valero Energy (VLO), and Tesoro (TSO), have 1.7 MMbpd, 2.9 MMbpd, and 0.85 MMbpd of refining capacity, respectively.
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For refining sector stocks, you can consider the iShares US Energy ETF (IYE). The ETF has ~10% exposure to the sector.
Phillips 66’s refining margin indicators
A refiner’s operating income depends mainly on its gross refining margin (or GRM). Key factors that affect PSX’s GRM are refined product cracks and crude oil differentials. The higher the cracks, the better the GRM. Also, the wider the crude oil price gap, the healthier the GRM for Phillips 66.
According to PSX, dollar-per-barrel changes in gasoline and the distillate crack spread affect its annual net income by $220 million and $200 million, respectively. Likewise, dollar-per-barrel changes in petroleum oil prices such as LLS-Maya (Louisiana Light Sweet–Maya) and WTI-WCS (West Texas Intermediate–Western Canadian Select) affect its income by $50 million and $40 million, respectively. Tracking these indicators can point toward PSX’s refining margin strength in the near-term.
PSX’s refining margin and cracks are influenced by its diverse areas of operations such as the Gulf Coast, Central Corridor, Western Pacific, and Europe. In 3Q15, USGC (US Gulf Coast) gasoline cracks widened by $4.9 per barrel over 3Q14 to $13.4 per barrel, positively affecting the company’s overall refining margin.
On the other hand, in 3Q15, USGC distillate cracks narrowed by $3.1 per barrel, and the WTI-WCS spread fell by $3.2 per barrel over 3Q14, pressuring PSX’s refining margin.
Plus, the rise and fall of cracks and oil differentials in other areas had an overall positive impact on PSX’s refining margin. PSX noted a rise in GRM by $3.1 per barrel over 3Q14 to $14 per barrel in 3Q15. PSX’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) from its refining segment rose by 65% over 3Q14 to $1,816 million in 3Q15.