Morningstar | Phillips 66 Stung by Weak Refining Environment, but Outlook Favorable
Phillips 66 reported first-quarter adjusted earnings that fell to $187 million from $512 million a year ago as a weak refining market environment weighed on earnings. The refining segment posted a $219 million loss for the quarter compared with $110 million of adjusted earnings last year on a combination of narrower crude spreads, weak product margins, and downtime from planned and unplanned maintenance. The company's other segments fared slightly better. Chemical adjusted earnings fell to $227 million from $286 million while marketing and specialties adjusted earnings fell to $205 million from $222 million due to weak market conditions. The midstream segment was the lone bright spot, increasing adjusted earnings to $316 million from $280 million on improved transportation earnings. During the quarter, Phillips 66 repurchased $344 million of shares, in line with its guidance of $1 billion-2 billion of repurchases annually. Nothing in the quarter changes our view as Phillips 66 continues its progress on a host of projects that should lead to earnings growth across each segment. Our fair value estimate and moat rating are unchanged.Despite the difficult refining market environment in the first quarter, we expect better days are ahead. We anticipate a recovery in conditions as the year progresses. Gasoline inventories have already fallen due to lower industry utilization, spurring a recovery in margins as we enter the summer driving season. Heavy sour crude spreads might remain under pressure in the near term given lack of supply, but we anticipate a widening later in the year as IMO 2020 approaches. This should also give distillate margins a boost heading into next year. Phillips 66 should benefit from both, given its relatively high distillate yields and consumption of heavy crude. As such, we expect the improved macro environment should translate into improved results for the refining segment.
For more, see our April 15 sector report, "Independent Refiners: Market Takes Its Foot Off the Gas."
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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