Will Phillips 66 Post Better Q2 Results Than Its Peers?


Jul. 11 2019, Published 8:37 a.m. ET

Phillips 66’s first-quarter review

Phillips 66 (PSX) plans to post its second-quarter results on July 26. Before we continue with the second-quarter estimates, let’s review Phillips 66’s performance in the first quarter.

Phillips 66’s first-quarter revenues of $23.1 billion reflected a fall of ~2% YoY (year-over-year). The company’s adjusted EPS was $0.40 in the first quarter. The EPS beat analysts’ consensus estimate of $0.34. However, the company’s first-quarter adjusted EPS fell 62% YoY.

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Phillips 66’s net adjusted income attributable to its shareholders fell by almost half to $0.3 billion in the first quarter. Phillips 66’s adjusted pre-tax earnings fell due to YoY declines in its refining, chemicals, and marketing earnings. The fall was partially offset by a YoY increase in the company’s midstream earnings.

Phillips 66’s Refining segment’s earnings fell to -$219 million in the first quarter. Lower refining margins led to subdued earnings in the segment. Phillips 66’s Chemicals segment’s adjusted earnings fell 21% YoY to $227 million in the first quarter. The Marketing segment’s adjusted earnings fell 8% YoY in the first quarter. In contrast, the Midstream segment’s earnings rose 13% YoY.

Phillips 66’s second-quarter estimates

Phillips 66 is expected to post an EPS of $2.52 in the second quarter—10% lower than its adjusted EPS in the second quarter of 2018. However, the estimated EPS is 530% higher compared to the adjusted EPS in the first quarter. The company’s revenues are estimated to be ~$28.5 billion in the second quarter. Phillips 66’s estimated revenues are ~4% lower than its revenues in the second quarter of 2018.

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Valero Energy (VLO) and Marathon Petroleum (MPC) are expected to post 18% YoY and 37% YoY lower EPS, respectively, in the second quarter. PBF Energy (PBF) and Delek US Holdings’ (DK) earnings could fall 28% YoY and 19% YoY, respectively. However, Holly Frontier’s (HFC) earnings are expected to rise 6% YoY to $1.54 in the second quarter.

In the second quarter, leading US refiners’ refining margin indicators have put up a mixed trend. The US Gulf Coast WTI 3-2-1, the industry crack, rose in the second quarter—compared to the second quarter of 2018. Holly Frontier’s refining indexes rose. However, Valero Energy’s refining crack indicators fell in its main operating regions. Marathon Petroleum’s indicators had a mixed performance.

Will Phillips 66 post higher refining earnings?

Phillips 66’s consolidated refining margin contracted by $2.1 per barrel YoY to $7.2 per barrel in the first quarter. The company’s refining margins contracted in three of its four operating regions. The Central Corridor region fell 36% YoY to $10.2 per barrel in the first quarter. The region processed 23% of Phillips 66’s throughput in the first quarter. The West Coast, which refined 17% of Phillips 66’s throughput, fell 25% YoY to $6.3 per barrel in the first quarter.

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The Gulf Coast, which refined 36% of the throughput, fell 19% YoY to $5.4 per barrel in the first quarter. However, the Atlantic Basin/Europe region expanded 8% YoY to $7.8 per barrel in the first quarter. The region processed 23% of Phillips 66’s total throughput. The narrower Canadian and inland crude oil spread impacted Phillips 66’s overall refining margin in the first quarter.

In the second quarter, Phillips 66’s refining margins could be impacted positively by the better refining crack in the US Gulf Coast. The USGC WTI 3-2-1 crack shows the profit that refiners earn when they refine three barrels of WTI to create two barrels of gasoline plus one barrel of distillate. The crack is a leading indicator for refiners with capacities in the USGC. Phillips 66 has large refining capacities in the region. In the second quarter, the USGC WTI 3-2-1 has risen 9% YoY to $20 per barrel.

However, oil spreads narrowed in the second quarter. WTI Cushing-WTI Midland fell 71% YoY, while the WTI-WCS spread fell 30% YoY in the quarter. The decline in the oil spread could dent Phillips 66’s refining margins and earnings in the second quarter.

For Phillips 66’s peers, the refining margin indicators were mixed in the second quarter. Valero Energy’s crack indicators narrowed in two of its operating regions, the US Gulf Coast and North Atlantic, in the second quarter. These regions accounted for ~75% of the company’s throughput in the first quarter. In the second quarter, four out of Valero Energy’s five spreads narrowed YoY. The Brent-Maya spread saw the highest fall in the second quarter. However, Holly Frontier’s Midcon, Rockies, and Southwest refining indexes rose 10%, 12%, and 4% YoY, respectively, which could boost its refining earnings. Marathon Petroleum’s refining margin indicators were mixed. While the company’s sweet and sour differentials narrowed 20% and 74% YoY, its blended crack expanded 17% YoY in the second quarter.

Analysts expect Phillips 66’s chemicals, midstream, and marketing earnings to continue to support the company’s total profits in the second quarter. These segments could partly shield Phillips 66’s overall earnings from refining earnings volatility.

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Analysts’ recommendations

Phillips 66 is rated by 18 Wall Street analysts. Among the analysts, 13 or 72% recommended a “buy” or “strong buy,” while five or 28% recommended a “hold.” In July, Raymond James raised its target price on Phillips 66 stock from $106 to $110. Phillips 66’s mean target price is $116 per share, which implies an ~18% gain from the current level.

Marathon Petroleum and Valero Energy have been rated as a “buy” by 94% and 84% of the analysts, respectively. Delek US Holdings, HollyFrontier, and PBF Energy have been rated as “buy” by 47%, 18%, and 50% of the analysts, respectively.

Phillips 66 has “buy” ratings due to its diversified and growth-oriented earnings model and sound financials.

Phillips 66 has a healthy debt level on its balance sheet. In the first quarter, the company had 30% debt in its capital structure. Marathon Petroleum and Valero Energy had debt of 39% and 32%, respectively.

Phillips 66 has an advantageous earnings mix. In the first quarter, Phillips 66’s refining loss was $219 million. However, the chemicals, midstream, and marketing earnings combined were $748 million.

In the first quarter of 2018, the Refining segment’s earnings were $110 million. In the second quarter and third quarter of 2018, the refining earnings were just above $1 billion each. In the fourth quarter of 2018, the company’s refining earnings were more than $2 billion. In 2018, Phillips 66’s quarterly refining earnings were volatile. The refining earnings weren’t stable due to changing refining cracks, spreads, and margin conditions.

In 2018, the Midstream, Chemicals, and Marketing segments had combined earnings of $788 million in the first quarter and $816 million in the second quarter. In the third quarter and fourth quarter of 2018, the segments had consolidated earnings of $960 million and $1153 million, respectively. The segments mainly had a steady earnings stream in the previous year.

Phillips 66’s earnings mix suggests that the company has successfully created a diversified earnings model capable of sustaining its earnings in a weaker refining environment—a favorable scenario. Phillips 66’s diversified model could solidify more once important projects in the company’s Midstream segment start contributing to its overall earnings. To learn more about Phillips 66’s expansion activities, read Phillips 66 Focuses on Midstream Expansion and Refining Upgrades.


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