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Must-know: Putting Phillips 66’s debt levels into perspective

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Nov. 20 2020, Updated 2:41 p.m. ET

Phillips 66’s debt levels

During March 2012, Phillips 66 (PSX) issued $5.8 billion in senior notes. It took its long-term debt from $361 million in 2011 to $6.9 billion in 2013. The high debt level also increased its debt-servicing charges. Its interest expense increased from $17 million in 2011 to $246 million in 2012. It increased to $275 million in 2013.

PSX generates enough cash flow from operations to service its debt level, spend on growth plans, and pay dividend. During 2013, it recorded $6 billion in cash from operations. It received $1.2 billion from asset dispositions. This available cash was mainly used for capital expenditures and investments at $1.8 billion, repurchases of shares at $2.2 billion, debt repayments at $1 billion, and dividend payments at $0.8 billion. By the end of June 2014, it had ~$4.9 billion cash and cash equivalents.So it’s net debt (total debt less cash and cash equivalents) is ~$1.2 billion.

So, the high debt level is not truly a concern of PSX.

There’s no imminent liquidity crisis. Its current asset to current liability was 1.36 by June 2014. PSX is generating enough cash to cover its major needs. Its high debt level is a concern—particularly if there’s any liquidity crunch in the financial market.

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Also, as noted above, PSX’s adjusted earnings before interest, taxes, depreciation, and amortization (or EBITDA) hasn’t increased in line with its debt level. From 2011 to 2012, adjusted EBITDA increased ~42%. However, it declined 26% in 2013 due to the poor performance of PSX’s Refining and Marketing segments. Going forward, if EBITDA doesn’t increase its debt-to-EBITDA, it could lag its peers. This would put more pressure on its valuation.

Other refinery companies with similar net debt-to-EBITDA ratio include Valero Energy Corp. (VLO), Tesoro Corp. (TSO), and Marathon Petroleum (MPC). Some of these companies are components of the Energy Select Sector MLP ETF (XLE). Read Part 20 in this series to learn more about PSX’s relative valuation and its peers.

Visit the Market Realist Energy & Power page to learn more about the industry.

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