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Third Point initiates new position in Phillips 66

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Third Point and Phillips 66

Third Point established a new position in Phillips 66 (PSX) through the purchase of 5 million shares for a total value of $359 million. Phillips 66 (PSX) now represents 3.23% of the fund’s portfolio size.

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 Phillips 66 company profile

Phillips 66 (PSX) is a Texas-based energy company. The company’s operations fall under four segments: refining, chemicals, midstream operations, and the marketing of refined and specialties products. The company manufactures gasoline, distillates, jet fuel, asphalt, lubricants, petrochemicals, and other refined products. Phillips 66 started operating independently as a publicly traded company on April 4, 2012, when it separated from ConocoPhillips (COP).

Earnings beat estimates

In 4Q14, the company’s revenues were down 19% to $34.9 billion from $43.0 billion recorded a year ago. The decline in revenues was primarily on account of a lower price environment for commodities such as petroleum products, crude oil, and natural gas liquids.

Despite the revenue decline, Phillips 66 experienced an uptick in earnings. Fourth quarter net income was up 39% from $826 million recorded in 4Q13 to $1.1 billion. The higher net income was primarily driven by higher bio diesel blending tax credits, which contributed to ~$65 million increase in net profit for the Marketing and Specialties segment. Earnings adjusted for special items of $234 million were $913 million in 4Q14 compared to $808 million for the corresponding quarter in the prior year. On a per share basis, adjusted EPS was up to $1.63 from $1.37 a year earlier, beating consensus estimates by 16%.

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Positive shareholder returns

On the capital allocation front, Phillips 66 distributed $3.8 billion in 2014 of which $1.1 billion was in the form of dividends and $2.7 billion was through share repurchases. Furthermore, the company exchanged its flow-improver business for 17.4 million shares and thereby returned $1.35 billion of capital to shareholders. Since August 2012, the company has repurchased 73.2 million shares for $4.9 billion as part of $7 billion in share repurchase authorizations.

The company’s 2015 guidance has a $4.6 billion capex plan of which 65% is dedicated to improving its midstream business. Reflecting on the company’s future prospects, Greg Garland, chairman and CEO of Phillips 66, commented, “We are making prudent capital allocation decisions to drive Phillips 66’s continued success, and the recently announced 2015 capital budget underscores our commitment to value creation. Investments in Midstream and Chemicals should result in more consistent earnings and a higher valuation. Our strong balance sheet and financial flexibility allow us to maintain a disciplined approach to reinvestment and distributions throughout the commodity price cycle.”

Phillips 66 is a component of the Energy Select Sector SPDR ETF (XLE) and has a portfolio allocation of 2.53%.

Third Point’s 4Q14 trade activity

In 4Q14, the fund added new positions in Citigroup (C), EMC (EMC), and Phillips 66 (PSX). The fund increased its stake in Amgen (AMGN), Alibaba (BABA), and eBay (EBAY). Notable exits in the fourth quarter included Coca-Cola (KO), Bed Bath & Beyond (BBBY), and YPF Sociedad Anonima (YPF). In addition, the fund lowered its position in Ally Financial (ALLY) and Dow Chemical (DOW).

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