How Phillips 66’s Leverage Curve Is Trending



Phillips 66’s leverage compared with peers

Phillips 66’s (PSX) leverage ratio, or its net-debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) multiple, stood at 3.7x in 2Q17—higher than the average industry ratio of 2.4x.

The industry average considers eight American refining companies, and this particular multiple shows a firm’s debt as a multiple of its earnings.

In 2Q17, PSX’s total-debt-to-capital ratio stood at 30%, which was below the industry average of 35%. The debt-to-capital ratio depicts the percentage of debt in a firm’s capital structure.

Peers Valero Energy (VLO), Marathon Petroleum (MPC), and Andeavor (ANDV) have total-debt-to-capital ratios of 30%, 38%, and 38%, respectively. (For further details, check out Market Realist’s “A Look at Refiners’ Leverage in 2Q17.”)

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Phillips 66’s leverage curve: rising net-debt-to-EBITDA

PSX’s net-debt-to-EBITDA ratio rose from 0.8x in 2Q15 to 3.7x in 2Q17. Before analyzing this increase, let’s look at PSX’s net debt trend.

Phillips 66 (PSX) net debt rose from $3.9 billion in 2Q15 to $7.8 billion in 2Q17. Its net debt rose due to a rise in total debt and a fall in cash from 2Q15 to 2Q17. PSX’s debt rose sharply over the past few years due to its unstable refining earnings, growth projects, and shareholder returns (dividend and share repurchases). In 2Q17, Phillips 66’s total debt and cash stood at $10.0 billion and $2.2 billion, respectively.

PSX’s EBITDA fell from 2Q15 to 2Q17 because of the volatile refining environment, which led to lower refining earnings. Thus, the rise in net debt coupled with the decline in EBITDA resulted in a steep surge in PSX’s net-debt-to-EBITDA ratio.

What does Phillips 66’s leverage suggest?

Phillips 66’s total-debt-to-capital ratio is lower than the industry average—a favorable scenario. However, due to its capital expenditure or capex activities and the volatile refining margin environment, the company has increased its debt, which has caused its net-debt-to-EBITDA ratio to move above the peer average.

However, in 2Q17, a fall in its total debt and a rise in its cash led to a decline in PSX’s net debt. PSX’s cash rose and its debt fell due to better refining earnings in 2Q17, which can be read as a good sign that hints at the future improvements in leverage—if the refining environment remains favorable.

In the next part, we’ll analyze Phillips 66’s cash flow.


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