Why fall in oil price improved Phillips 66’s Refining segment margin

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Which segment gained and which one lagged?

The previous part of the series was a discussion on Phillips 66’s (PSX) revenues and earnings for 3Q14 versus 3Q13. In this article, we will find out which segment advanced and which one lagged during the latest quarter.

Revenue Split

From 3Q13 to 3Q14, Phillips 66’s (PSX) Marketing and Specialties segment gained ground. It accounted for 70% of the company’s total revenues versus 67% in 3Q13. The company’s Refining segment’s share in total revenues fell from 31% to 28% during the same period.

Phillips 66’s Refining segment’s revenues in 3Q14 decreased 17%, to $11.14 billion from $13.47 billion in 3Q13. This was primarily due to lower prices for petroleum products. The Refining segment’s share in revenue split also decreased in 3Q14.

Segmentwise Net Income

Refining segment net income shines

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In sharp contrast to revenue share split described above, Phillips 66’s (PSX) net income dramatically improved in its Refining segment. Refining margins increased as the company was able to cash on lower crude prices sourced from lower-priced regions and higher-price realizations on its clean products.

Higher crack spread in the United States led Phillips 66 to increase its refining margins. Worldwide, crack spread increased due to the average market crude oil price declining more than the average market gasoline and distillate prices. Typically, refiners profit when crack spread increases. Read more about crack spread and its effects of PSX in our article Why the crack spread signals the Refining segment’s performance.

Refiners also benefit when the price of crude oil, which is used as the raw material, comes down. Crude oil price has been on a decline since July of this year. Read Post 8 to learn how crack spreads and how oil price differentials are affecting Phillips 66. Other companies in the refining sector benefiting from lower crude include HollyFrontier (HFC), Valero Energy (VLO), and Tesoro Corp. (TSO). All these are components of Energy Select Sector of Standard and Poor’s depositary receipt (or SPDR) exchange-traded fund (or ETF) (XLE).

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