Financial Markets - Investor Desk

Business Strategy & Outlook

Phillips 66 remains the most diversified independent refiner with greater interests in marketing, chemical, and midstream assets than peers. While the performance of its refining segment will be the primary determinant of earnings in the near term, the midstream segment will increasingly be the value driver over time as Phillips 66 aims to grow its potential midcycle EBITDA by $3 billion to $13 billion by 2025. With an increased interest in DCP midstream, and planned buyout of the remaining public units, Phillips 66 increased its midstream NGL business size and scale which now stretches across the entire value chain from wellhead to market. With this larger platform, management plans to deliver $1.1 billion of its targeted midcycle EBITDA growth. Refining will remain a critical segment as performance is set to improve. Its midcontinent refineries are some of the firm’s best positioned, given their access to discount domestic and Canadian crudes. Its two Gulf Coast refineries benefit from pipelines that provide access to discount light and heavy crude, while the coastal location affords access to valuable export markets. Projects designed to increase utilization and capture rates and reduce costs are expected to improve the segment’s positioning and performance.

Total cost savings across the entire organization, including headcount reduction are expected to deliver $800 million by year-end 2023, plus a $200 million reduction in sustaining capital requirements. Phillips 66’s two California refineries and one East Coast refinery are the least competitive of its U.S. portfolio. As a result, it is converting its San Francisco area refinery to produce 800 million gallons of renewable fuels by 2024, which it expects to deliver $700 million of its EBITDA growth. Phillips 66 holds its chemical assets in CPChem as a 50/50 joint venture with Chevron. Production capacity is primarily concentrated in the United States (80%) and the Middle East, where CPChem can take advantage of low-cost feedstock like ethane. Future growth will come from projects in the Gulf Coast and Qatar toward the end of the decade, with little contribution from this segment toward the 2025 goals.

Financial Strengths

Management has been focused on reducing debt accumulated during 2020. At year-end 2021, it had largely succeeded in bringing debt back down to pre pandemic levels with the net debt/capital ratio falling to 29%, compared with 27% in 2019. It plans to maintain the ratio in the range of 25% to 30%.

With leverage targets achieved, management has revised its shareholder return targets along with its earnings growth guidance. It plans for $10 billion-$12 billion of shareholder distributions by year-end 2024. At its mid-cycle estimate of $10 billion in operating cash flow by 2025, it expects to direct at least 40% to shareholder returns. Capital spending will remain at $2 billion through 2024 but likely increase modestly thereafter given the growth in the business. At this level, management has suggested up to $7 billion could go toward shareholder returns at midcycle operating cash flow levels.

Bulls Say

Phillips 66 is expanding its midstream and chemical segments so that refining will eventually represent a minority of total earnings and help mitigate the risk of falling refined product demand.
Phillips 66 stands to benefit from higher crude oil prices, which could benefit the NGL fractionation operations in its midstream business.
With one of the highest distillates yields among its peers, Phillips 66 is well positioned for the long term, where the growth outlook for distillate is more favorable than gasoline.

Company Description

Phillips 66 is an independent refiner with 12 refineries that have a total crude throughput capacity of 2.0 million barrels per day, or mmb/d, after converting its 255 mb/d Alliance refinery to a terminal. The midstream segment comprises extensive transportation and NGL processing assets. It also includes its DCP Midstream joint venture, which holds 45 natural gas processing facilities, 11 NGL fractionation plants, and a natural gas pipeline system with 58,000 miles of pipeline. Its CPChem chemical joint venture operates facilities in the United States and the Middle East and primarily produces olefins and polyolefins.

(Source: Morningstar)

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