Phillips 66’s 1Q18 Refining Margin Outlook



PSX’s segment-wise analysis

Before we proceed with Phillips 66’s (PSX) refining margin outlook for 1Q18, let’s look at PSX’s segment-wise earnings and refining margin in 4Q17. In 4Q17, Phillips 66’s total adjusted net income rose 431% YoY (year-over-year) to $605 million, and its refining earnings rose from -$95 million to $358 million due to wider refining margins and a higher utilization rate. The greatest contributor to Phillips 66’s overall adjusted net income was its refining segment, whose earnings contributed 59% of the company’s total adjusted income in 4Q17. PSX’s midstream segment contributed 23% of its total earnings, and chemical earnings, which fell 2% YoY to $121 million, contributed 20%. PSX’s marketing and specialty segment also contributed 20% of its total adjusted earnings in 4Q17.

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Phillips 66’s 1Q18 refining margin outlook

In 1Q18, Phillips 66’s refining margins could widen due to better refining cracks, which have been reflected in the refining margins of two of the largest US oil refining companies.

In 1Q18, Andeavor’s (ANDV) refining index values expanded YoY in two of three operating areas, and its consolidated index value rose marginally YoY, from $12.20 to $12.80 per barrel. Refining crack indicators in three of the four areas where Valero’s (VLO) refineries operate rose YoY.

However, Marathon Petroleum’s (MPC) refining earnings indicator, the blended LLS (Louisiana Light Sweet) 3-2-1 crack, narrowed YoY in 1Q18. This narrowing could be partially offset by the LLS-WTI (West-Texas Intermediate) spread and sweet-sour differential expanding. HollyFrontier’s (HFC) index values have fallen in two of its three operating regions.

The broader market crack, the US Gulf Coast WTI 3-2-1, expanded 8% YoY to $15 per barrel in 1Q18. The US Gulf Coast is a significant refining area for Phillips 66, accounting for ~36% of its crude oil throughput. Therefore, a YoY expansion in the US Gulf Coast WTI 3-2-1 could indicate that PSX’s refining margin will expand 1Q18.


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