Morningstar | Phillips 66 Reports Strong Earnings Growth Across the Board; Shares Trade at Slight Discount to FVE
Phillips 66 was firing on all cylinders in the third quarter, with each of its segments reporting year-over-year increases to drive adjusted earnings to $1.5 billion from $858 million the year before. Refining continues to be the primary driver thanks to wide crude spreads and strong product margins. Phillips 66's midcontinent refineries were able to capitalize on wide Western Canadian Select differentials to drive segment adjusted earnings to $959 million from $548 million the year before. Midstream segment earnings soared to $261 million from $99 million the year before on strong transportation and natural gas liquids operating results. Chemical adjusted earnings increased to $210 million from $153 million last year while marketing and specialties adjusted earnings increased to $290 million from $211 million last year. Keeping with its goal to return 40% of cash flow on average to shareholders, Phillips 66 repurchased $405 million in shares and paid $370 million in dividends during the quarter. Guidance remains for repurchases of $1 billion-$2 billion per year depending on conditions.We expect the strong refining performance to continue for Phillips 66, particularly on the refining side in the near term. The wide differentials that drove refining earnings should persist through the end of next year and possibly longer. We see WCS differentials narrowing in 2020 with the addition of new pipeline capacity, but IMO 2020 regulations could keep the discount wider for longer, benefiting Phillips 66. Meanwhile, the company continues to hold a strong queue of projects to increase its midstream and chemical earnings over time. Our fair value estimate and moat rating are unchanged, and the shares are trading at slight discount after a recent sell-off.
For more on IMO 2020 and valuation implications, see our Sept. 21 report, "Independent Refiners: Laissez les Bons Temps Rouler?"
Phillips 66 is an energy manufacturing and logistics company with midstream, chemicals, refining, and marketing and specialties businesses. The company's segments include: Midstream, which provides crude oil and refined petroleum product transportation, terminaling and processing services, as well as natural gas and natural gas liquids transportation, storage, processing and marketing services; Chemicals, which manufactures and markets petrochemicals and plastics on a worldwide basis; Refining, which refines crude oil and other feedstocks into petroleum products; and Marketing and Specialties, which purchases for resale and markets refined petroleum products, mainly in the United States and Europe.
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