Phillips 66 — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Phillips 66 operates in Midstream, Chemicals, Refining, and Marketing and Specialties. Results include DCP Midstream Class A Segment and related pipeline businesses only from August 18, following a merger and change in control; this limits direct comparability with 2021.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Sales and operating revenues | $44.955B | $30.243B | $129.711B | $78.872B |
| Net income attributable to Phillips 66 | $5.391B | $402M | $9.140B | $44M |
| Diluted EPS | $11.16 | $0.91 | $19.31 | $0.08 |
| Operating cash flow | $3.1B | Not stated clearly for quarter | $6.063B | $4.217B |
Q3 income before tax was $7.158B, with $1.618B of income tax expense. The reported earnings include a $3.013B aggregate gain tied to the DCP Midstream/Gray Oak transaction. Higher refining and international marketing margins and lower impairment charges also contributed to the year-over-year improvement.
Segment results, Q3 income before tax: Midstream $3.645B (prior year $629M), Refining $2.851B (prior-year loss of $1.126B), Marketing and Specialties $847M (up from $545M), and Chemicals $135M (down from $631M). Midstream includes the merger gain. Worldwide realized refining margin was $26.58 per barrel versus $8.57; refinery utilization was 91% versus 86%. Chemicals faced weaker olefins/polyolefins margins, higher feedstock and utility costs, and lower quarterly sales volumes.
Cash, debt and capital allocation: At September 30, cash was $3.744B, total debt $17.657B, and total equity $33.309B; debt-to-capital was 35%, down from 40% at year-end 2021. Cash and cash equivalents exceeded current liabilities by $5.388B. The company reported $6.7B of available committed capacity across its and DCP LP’s facilities. In the first nine months, it generated $6.063B of operating cash, spent $1.481B on capital expenditures and investments, repaid $1.957B of debt, paid $1.337B in common dividends, and repurchased $760M of shares.
Changes, outlook and risks
- Revenue rose 49% in Q3 and 64% for the first nine months, primarily reflecting higher prices for refined products, crude oil and NGL. Purchased crude oil and products also increased substantially.
- On August 17, Phillips 66 and Enbridge realigned their interests in DCP Midstream and Gray Oak. Phillips 66 began consolidating the DCP Class A Segment and related pipeline entities on August 18. The purchase-price allocation remains preliminary and may be adjusted during the one-year measurement period.
- Management is pursuing a multi-year cost transformation, targeting at least $800M of sustainable annual run-rate cost reductions and at least $200M lower annual sustaining capital by the end of 2023. Q3 restructuring costs were $74M; nine-month costs were $99M.
- No specific company-wide earnings or revenue guidance is provided in the filing. Management said it planned to repay $500M of 3.700% notes due April 2023 by the end of 2022. The board later increased the share repurchase authorization by $5B on November 7, 2022.
- Phillips 66 submitted a non-binding proposal to buy DCP LP’s publicly held common units for $34.75 per unit, approximately $3.1B. Approval, definitive agreements, financing and completion are uncertain.
- Key exposures include volatile commodity prices and refining, marketing and chemicals margins; operating, maintenance and weather disruptions; environmental and climate regulation; and legal and remediation costs. For Dakota Access, the draft environmental impact statement was expected in spring 2023; an unfavorable litigation outcome could trigger Phillips 66’s estimated $467M share of contingent equity contributions, plus potential ongoing support.
- Unusual items include the $3.013B merger-related gain and a $418M nine-month unrealized investment loss on NOVONIX. The prior-year comparison includes a $1.298B Alliance Refinery impairment in Q3 2021 and a $198M Liberty Pipeline impairment in Q1 2021.
Investor verification points
- Separate recurring segment performance and cash generation from the one-time DCP/Gray Oak remeasurement and transfer gains; confirm the final acquisition-date fair values.
- Review the comparability effects of consolidating DCP businesses from August 18 and the Phillips 66 Partners merger completed in March 2022.
- Monitor progress and realized savings against the transformation targets, and clarify which costs and capital reductions are recurring.
- Track the DCP LP take-private proposal, including final terms, approvals, financing and any resulting effect on debt and liquidity.
- Assess refining margin sustainability, chemicals weakness, affiliate distributions, and working-capital needs as commodity prices and market conditions change.
- Follow Dakota Access permitting and litigation developments, as well as environmental, climate, and other contingent obligations.