Morningstar | Refining Continues to Deliver for Phillips 66; Shares Undervalued
Phillips 66 reported strong year-over-year adjusted earnings growth thanks to contributions from nearly every segment, but it was refining that stole the show. Total adjusted earnings increased to $2.3 billion from $548 million last year as refining-adjusted operating earnings increased to $2.0 billion from $510 million last year. The improvement was largely the result of wider North American crude differentials capture by its Central Corridor and Gulf Coast refineries. Midstream-adjusted operating income more than doubled to $409 million from $196 million last year while marketing- and specialties-adjusted operating income jumped to $592 million from $168 million. Chemicals was the lone weak spot with adjusted operating earnings sliding to $152 million from $161 million. Management repurchased $497 million worth of shares during the quarter.The strong performance of the last couple of quarters is likely to subside in the first quarter as crude differentials have narrowed and gasoline margins weakened. However, the longer-term outlook remains favorable with a healthy economy keeping demand strong and IMO 2020 regulation providing a tailwind that could lift distillate margins and widen heavy crude differentials. Phillips 66 is well positioned to benefit from both. At the same time, it continues to boast a diversified portfolio and queue of midstream and chemical projects to drive earning growth. Meanwhile after being fairly valued for several years, we finally see value in Phillips 66 shares after a sell-off late last year, opening at a buying opportunity. Our fair value estimate and narrow moat rating are 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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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