Is Phillips 66’s Debt Position Improving?

Phillips 66’s (PSX) net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) stood at 2.1x in 4Q17, higher than the average industry ratio of 1.6x. The industry average considers eight American refining companies. The ratio indicates a company’s debt as a multiple of its earnings.

In 4Q17, PSX’s total debt-to-capital ratio was 27%, below the industry average of 34%. The debt-to-capital ratio depicts the percentage of debt in a company’s capital structure. Peers Valero Energy (VLO), Marathon Petroleum (MPC), and Andeavor (ANDV) have total debt-to-capital ratios of 29%, 38%, and 36%, respectively.

PSX’s net debt-to-EBITDA ratio rose from 1.1x in 4Q15 to 2.1x in 4Q17. Before analyzing the increase in the ratio, let’s look at PSX’s net debt trends.

Phillips 66’s net debt rose from $5.8 billion in 4Q15 to $7.0 billion in 4Q17. Its net debt increased due to its total debt rising more steeply than cash. PSX’s debt has risen sharply in the past few years due to its unstable refining earnings, growth projects, and shareholder returns (dividend and share repurchases). In 4Q17, Phillips 66’s total debt and cash stood at $10.1 billion and $3.1 billion, respectively.

PSX’s trailing-12-month EBITDA fell between 4Q15 and 4Q17. Therefore, a rise in net debt coupled with a decline in EBITDA resulted in PSX’s debt-to-EBITDA ratio rising.

Phillips 66’s total debt-to-capital ratio is lower than the industry average, a favorable scenario. Plus, since 1Q17, PSX’s net debt has declined due to its total debt falling and cash rising thanks to better earnings. Earnings have risen since 1Q17 due to combined refining, midstream, and chemical earnings growth. If this trend continues, PSX could see higher earnings and surplus discretionary cash, resulting in a decline in total debt in the near future. In the next part, we’ll analyze Phillips 66’s cash flow.