Phillips 66’s Valuation: The Impact of 4Q17 Earnings



Impact of 4Q17 earnings on Phillips 66’s valuation

In the previous part of this series, we saw the changes in Phillips 66’s (PSX) stock price forecast range. Now, we’ll look at Phillips 66’s forward valuation compared to its peers.

Phillips 66 posted better-than-expected 4Q17 earnings. However, the decline in the broader market and benchmark refining crack presumably led to 3.8% fall in its stock price, which also impacted Phillips 66’s valuation. Despite the fall in PSX’s stock, its valuation remained above the peer averages.

Currently, PSX trades at a forward PE (price-to-earnings ratio) of 13.6x, above its peer average of 11.9x. Most of PSX’s peers trade above the average forward PE—except for Andeavor (ANDV) and PBF Energy (PBF), which trade at forward PEs of 10.2x and 9.2x, respectively.

Moving to EV-to-EBITDA, we see that Phillips 66 (PSX) trades at the forward EV-to-EBITDA of 8.8x—again above its peer average of 6.9x. PSX’s peers Marathon Petroleum (MPC) and HollyFrontier (HFC) also trade above the average at 7.5x and 7.1x, respectively.

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But why the premium for PSX after 4Q17 earnings?

Phillips 66 trades above its peer averages, likely due to its earnings model, which is growth-oriented and well diversified. PSX focuses on improving steady income from its midstream and marketing segments along with growing returns from its refining segment.

This focus was apparent from comments by PSX’s chairman and CEO, Greg Garland, on the company’s 4Q17 earnings call. He said, “Our 2018 capital budget is $2.3 billion, including $1.4 billion of growth capital and $900 million of sustaining capital. Our portion of capital spend by CPChem, DCP, and WRB is expected to be about $900 million. As we move into 2018, our strategy for long-term value creation remains unchanged. This includes capturing growth opportunities in our midstream and our chemicals business, where we see long-term demand growth and enhancing returns in refining and marketing.”

So, if the refining environment improves, it could lead to higher earnings for the company. Plus, integrated downstream growth from capex activities could result in higher earnings and cash flows. So it’s no surprise that PSX continues to trade above the peer average.


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