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Why Has Phillips 66 Stock Risen 11% in Q4?

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Phillips 66 (PSX) stock has risen 10.5% in the current quarter. The stock has outperformed the equity market in the fourth quarter. Meanwhile, the S&P 500 Index (SPY) has increased 8.2% sequentially.

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Phillips 66’s peers put up a mixed show

In the fourth quarter, refining stocks have put up a mixed trend. While some of the stocks have outperformed SPY, others have underperformed it in the quarter. Valero Energy (VLO) and PBF Energy (PBF) stocks have risen 11.6% and 17.1% sequentially. They have outperformed the equity market.

However, Marathon Petroleum (MPC) stock has gained 0.4% in the quarter and underperformed the equity market. Delek US Holdings (DK) and HollyFrontier (HFC) stocks, which have fallen 5.2% and 3.8% sequentially, have underperformed SPY.

Several factors impact these stocks’ performances like the latest earnings, refining conditions, earnings expectations, and more. In the recent quarter, refiners like Phillips 66 and Valero Energy saw lower profits but posted better-than-expected earnings. Currently, changing refining conditions are more beneficial for refiners that have invested in modernizing and upgrading their refining capacities in the past few years.

While analysts expect some refiners’ earnings to expand sharply next year, others might see lower or negative growth. So, analysts’ earnings expectations have been weighing on these stocks.

Let’s evaluate how these factors played out for Phillips 66 in the current quarter.

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Why has the stock risen in Q4?

Phillips 66 stock has been impacted by higher-than-expected third-quarter earnings, strengthening refining conditions, and a better earnings outlook for 2020.

Beginning with the third-quarter earnings, the company’s EPS of $3.1 was higher than Wall Street analysts’ estimate of $2.6. The company’s profits fell 3% mainly due to lower refining earnings. However, better midstream, marketing, and chemical earnings supported the company’s total earnings. The stock reacted positively to the company’s results. To learn more, read Phillips 66 Earnings Beat Estimate, Stock Rose 4%.

Strong refining conditions

Strengthening refining conditions could benefit Phillips 66 in the current quarter.

In the quarter, refining cracks and sweet-sour spreads have been widening due to the upcoming IMO 2020. In the current quarter, the US Gulf Coast WTI 3-2-1 crack has risen 5.4% YoY to $15.3 per barrel. The benchmark crack shows the improving conditions in the quarter. Also, the crack is important for refiners like Phillips 66 that have significant refining capacity in the region.

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In the third-quarter earnings conference call, Greg Garland, Phillips 66’s chairman and CEO, discussed the changing refining conditions. He said, “We’ve seen high sulfur fuel oil discount start to widen as we’ve moved toward implementation and for refineries that continue to produce high sulfur fuel oil, there is a rapidly declining market for that product. So those discounts are starting to widen out and we think we’ll see above mid-cycle margins as we look into 2020 driven by this IMO impact.”

Phillips 66’s earnings to rise in 2020

Wall Street analysts expect Phillips 66’s earnings to increase 20% in the next year. Although the rise isn’t as sharp as the anticipated rise in Marathon Petroleum or Valero Energy’s earnings, it’s better than the lower or negative growth forecasts in HollyFrontier and Delek US Holdings’ earnings for the next year.

Phillips 66 will likely benefit from a strong refining environment, which is a result of IMO 2020. Also, the company’s integrated downstream business model should support its earnings.

Read Does Phillips 66 Stock Reflect a Strong Earnings Model? to learn more.

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