A Pre-1Q17 Review of Phillips 66’s Refining Margin Outlook
PSX’s segment analysis
Before we look at the outlook for Phillips 66’s (PSX) refining margin, let’s look briefly at its segments and their earnings and refining margins for 4Q16.
In 4Q16, Phillips 66’s (PSX) total adjusted net income of $83.0 million fell 88.0% YoY (year-over-year) and 85.0% QoQ (quarter-over-quarter). In 4Q16, its Refining segment recorded an adjusted loss of $95.0 million. Its worldwide refining margin fell $2.90 per barrel over 4Q15 to $6.50 per barrel in 4Q16, the weakest in the past two years.
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The biggest contributor to PSX’s total adjusted net income was its Marketing and Specialties segment, which contributed $140.0 million. Even though the segment’s earnings fell, the segment stayed positive. Earnings for its Chemical and Midstream segments fell to $124.0 million and $33.0 million, respectively, in 4Q16, from $182.0 million and $42.0 million in 4Q15, respectively.
Phillips 66’s first-quarter refining margin outlook
In 1Q17, Phillips 66’s (PSX) refining margins are expected to be higher due to a better crack performance. That’s reflected in the refining margin indicators of leading oil refining companies in 1Q17 over 1Q16.
Valero Energy’s (VLO) refining crack indicators have risen in three of the four zones in 1Q17 over 1Q16. Marathon Petroleum’s (MPC) refining margin indicators have had a better performance YoY in 1Q17. According to MPC, the blended LLS (Louisiana Light Sweet) crack has risen $3.10 per barrel over 1Q16 to $7.70 per barrel. The sweet-sour differential rose $0.07 per barrel YoY to $6.80 per barrel. Tesoro’s (TSO) consolidated refining index value has risen in 1Q17 over 1Q16.
The RIN (renewable identification number) cost, however, will likely put a dent in the refining earnings for downstream companies in 1Q17. For more on RINs, please refer to If Only the RFS Program Rumors Were True.
For exposure to refining stocks, you can consider the Vanguard Energy ETF (VDE). VDE has an ~8.0% exposure to the sector.