Morningstar | Phillips 66’s Refining Segment Delivers; Strong Performance to Continue, but Shares Fully Valued. See Updated Analyst Note from 30 Jul 2018
Phillips 66's adjusted earnings jumped to $1.3 billion from $569 million a year ago on strong growth across its integrated portfolio. The refining segment proved to be the engine of growth this quarter, with adjusted earnings soaring to $911 million from $233 million the year before on high utilization and favorable market conditions. Thanks to the startup of the Gulf Coast petrochemical assets, chemical earnings increased to $262 million from $196 million the year before. Midstream earnings rose to $202 million from $101 million on greater transportation earrings. Marketing and specialties was the lone outlier, with earnings slipping to $195 million from $218 million last year. During the quarter, Phillips 66 repurchased $230 million in shares and increased the quarterly dividend by 14%. Management reiterated its capital allocation plan for about 40% of cash flow to be returned to shareholders, portending future dividend growth and repurchases, although the latter might slow in the interim as debt is reduced further but will not veer over the long term.Like its refining peers, Phillips 66 is reaping the benefits of a strong refining market, including strong product margins and wide domestic light crude spreads. We expect these conditions will persist in the near term as economic conditions remain strong and pipeline capacity constraints keep spreads wide. Phillips 66 has the added tailwind of increasing nonrefining segment earnings, with several growth opportunities in its midstream and chemicals segments in the coming years. Add in the potential impact of IMO 2020, and Phillips 66 could deliver several years of strong earnings. However, we think this is largely priced in already, based on our assumption of an eventual return to midcycle conditions, leaving shares fully valued. Our fair value estimate increases to $107 from $102 on an improved near-term outlook after the strong quarterly results. Our narrow moat rating is unchanged.
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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