Iridian exits position in Phillips 66
Iridian Asset Management traded notable positions in the third quarter. It initiated new stakes in Graphic Packaging Holding Company (GPK), Altera Corporation (ALTR), and Timken Company (TKR). The fund also sold its shares in Health Net, Inc. (HNT), Tyco International Ltd. (TYC), and SeaWorld Entertainment (SEAS). During 3Q14, the fund increased its position in Phillips 66 (PSX) and NCR Corporation (NCR) and decreased its position in Dresser-Rand Group Inc. (DRC) and Avis Budget Group, Inc. (CAR).
Iridian exited its position in Philips 66 (PSX), which accounts for 3.20% of the fund’s third-quarter portfolio.
Phillips 66, a Texas-based energy company
Phillips 66 (PSX) is a Texas-based energy company. The company focuses primarily on refining, chemicals, midstream operations, and the marketing of refined and specialties products. Phillips 66 engages in the manufacture of gasoline, distillates, jet fuel, asphalt, lubricants, petrochemicals, and other refined products.
Phillips 66 began operating independently as a publicly traded company on April 4, 2012, when it separated from ConocoPhillips. Phillips 66 has four primary operating segments: Midstream, Chemicals, Refining, and Marketing and Specialties.
Revenue dips while net income rises
Philllips 66’s revenues for 3Q14 were down 8%, to $40.41 billion, compared to $44.14 billion recorded in the year-ago quarter. This resulted primarily from 17% and 15% declines in revenues from its Refining and Midstream segments, respectively.
For 3Q14, Phillips 66 recorded $1.18 billion in net income, up 121% from $535 million recorded in 3Q13. The surge in net profit came largely from significant improvements in the Refining segment as well as from its Marketing and Specialties segment.
Phillips 66’s net profit margin (or net profit as percentage of total revenues) also inflated to ~3% in 3Q14, up from 1.2% in the year-ago quarter. Despite a fall in revenues, Phillips 66 was able to improve net income and margins in its latest quarter.
Diluted earnings increased to $2.09 per share in 3Q14, compared to $0.87 per share in 3Q13.
Segment profits and asset sale boost net profit
The increase in Phillips 66’s net profit for 3Q14 over 3Q13 was due to higher profits recorded in its Refining segment. In this segment, margin improvement was primarily driven by lower crude prices. Crude oil is an input to refining, and thus, a lower crude price decreases operating cost and increases profit.
In addition, Phillips 66 recorded a $109 million deferred gain related to the sale of Immingham Combined Heat and Power Plant (or ICHP). Phillips 66 sold ICHP in July 2013 but deferred gain associated with the sale due to an indemnity provided to the buyer. ICHP belonged to Phillips 66’s Marketing and Specialties segment.
Phillips 66’s business segment performance
Phillips 66’s business segment performances for 4Q14 are listed below.
- Midstream segment. Revenues in 3Q14 decreased 15%, and net income decreased 22% . Earnings were negatively affected by lower natural gas liquids (or NGL) prices.
- Refining segment. Revenues in 3Q14 decreased 17%, primarily due to lower prices for petroleum products.
- Chemicals segment. Net income in 3Q14 decreased 12%. Earnings were negatively affected by a total $69 million impairments charge related to two of Chevron Phillips Chemical’s equity affiliate investments and the sale of Engineering Polymers.
- Marketing and Specialties segment. Revenues decreased marginally by 4%, but earnings increased 44%. The increase was due primarily to gains associated with the Immingham Combined Heat and Power (or ICHP) plant sale.
Phillips 66 forms two new joint ventures
Phillips 66 recently formed two joint ventures with Energy Transfer Partners and Energy Transfer Equity to develop the Dakota Access Pipeline (or DAPL) and Energy Transfer Crude Oil Pipeline (or ETCOP). Phillips 66 owns 25% interests in both projects and will spend approximately $1.2 billion to develop them.
Phillips 66 Partners to acquire property from parent
Phillips 66 Partners recently agreed to acquire new rail-unloading facilities and the Cross-Channel Connector Pipeline from Phillips 66, its parent company. The transaction is valued at $340 million and is expected to close in December 2014.
In the next section of this series, we will discuss Iridian Asset Management’s increased position in NCR Corporation (NCR).