Raymond James Cut Its Target Price on Phillips 66 Stock

Phillips 66 (NYSE:PSX) stock has fallen by 6.6% in the current year. The stock could be falling in anticipation of the company’s fourth-quarter earnings. Just ahead of the results, Raymond James lowered its target price on Phillips 66 stock from $130 to $125. The revised target price implies a 21% gain from the current level.

Phillips 66’s fourth-quarter expectations

While Wall Street analysts expect Phillips 66’s earnings to grow by 20% in 2020, they expect the company’s profits to fall by 50% YoY in the fourth quarter. In the fourth quarter, there were a lot of changes in the refining sector. Most refiners altered their configuration to take advantage of IMO 2020, which could have impacted their volumes in the quarter.

Also, maintenance could have impacted refining availability in the fourth quarter. In the conference call for the third-quarter results, Phillips 66’s vice president of investor relations, Jeff Dietert, mentioned that during the fall season, refiners usually go in for planned maintenance. Even Phillips 66 had some planned downtime in San Francisco, which could impact the company’s fourth-quarter performance.

In October, Dietert also said, “We have delayed some maintenance due to the strong margins and just the heavy maintenance that was planned at some of our other refineries but we’re probably in close to the peak of maintenance on the West Coast and expect as facilities come on those margins will normalize as we go into November and December.”

In the fourth quarter, oil price movements might have impacted the marketing margins. The chemical environment seemed weak. Meanwhile, the RIN (renewable identification number) prices rose in the quarter.

In the fourth quarter, according to Valero Energy’s (NYSE:VLO) data, ethanol RIN prices rose by 10% YoY to 14.4 cents per gallon. Also, biodiesel RINs rose by 41% YoY to 56.1 cents per RIN. Higher prices aren’t good news for refiners. They have to buy RINs in case they aren’t able to blend renewable fuels, according to the EPA’s yearly quota. So, RIN costs directly dent refiners’ earnings.

Analysts are positive

Among the 19 Wall Street analysts that cover Phillips 66 stock, 13 analysts or 68% recommend a “buy” or “strong buy.” The other six analysts recommend a “hold.” The mean target price is $129, which shows about a 24% upside potential.

So, most Wall Street analysts seem positive on Phillips 66 stock. The percentage is better than last year when only half of the analysts were positive on the stock. The increasing positiveness is due to the company’s diversified business model, growth and expansion activities, and sturdy debt position.

Phillips 66’s earnings are partially shielded from refining volatility due to its earnings model. Besides the refining segment, the company generates profits from its midstream, chemicals, and marketing segments. Phillips 66 plans to expand its midstream segment. The segment represents a stable income stream for the company. Read Does Phillips 66 Stock Reflect a Strong Earnings Model? to learn more.

The company has a strong debt position. Phillips 66’s total debt-to-capital ratio was 31% in the third quarter—lower than the peer average of 36%. Also, the company provides strong shareholder returns in the form of dividends and buybacks. In the first nine months, Phillips 66’s combined cash outflows on dividends and buybacks stood at $2.4 billion.

To learn about the refining sector’s outlook for the current year, read Best Refining Stocks: Comparing MPC, VLO, PSX, HFC.