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In Which Direction Will PSX’s Refining Margin Move in 4Q15?

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Jan. 19 2016, Updated 9:40 a.m. ET

PSX’s segment-by-segment analysis

In 3Q15, Phillips 66’s (PSX) total adjusted net income of $1,647 million rose by 44% compared to 3Q14. PSX has four business segments: refining, midstream, chemicals, and marketing.

In 3Q15, the refining segment contributed $1,052 million, or 64%, to adjusted net income, followed by the marketing and specialty segment, which contributed $344 million, or 21%. The chemicals segment contributed $272 million, or 17%, and the midstream segment contributed $91 million to adjusted net income.

Adjusted income from the refining segment saw a rise of 89% over 3Q14. Plus, adjusted income from the marketing segment rose by 33% over 3Q14. But this was partially offset by falls in adjusted income from the midstream and chemicals segments by 21% and 9%, respectively, in 3Q15.

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PSX’s refining margin indicators

Before examining PSX’s 4Q15 refining margin trend, let’s analyze its third-quarter refining margins. PSX saw its gross refining margin rise by $3.1 per barrel over 3Q14 to $14 per barrel in 3Q15. PSX’s refining operations are spread across different regions in the United States. The rise and fall of cracks and oil spreads in diverse areas had an overall positive impact on PSX’s refining margin in the third quarter.

However, in 4Q15, gasoline cracks have lowered in the United States. This is due to falling gasoline prices as a result of a huge pileup of gasoline stocks in the United States in the fourth quarter of 2015. According to PSX, a dollar per barrel change in the gasoline and distillate crack spread affects its annual net income by $220 million and $200 million, respectively.

The broader market refining margin indicator, the US Gulf Coast West Texas Intermediate 3:2:1 crack spread, has fallen. The crack spread that averaged $16 per barrel in 3Q15 dropped to $9 per barrel in 4Q15.

Lower cracks are also expected to affect the refining margins of PSX’s peers Marathon Petroleum (MPC), Valero Energy (VLO), and Tesoro (TSO). The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has PSX, MPC, VLO, and TSO in its portfolio.

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