Phillips 66 — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Phillips 66 operates in Midstream, Chemicals, Refining, and Marketing and Specialties. The quarter included the March 9 merger that made Phillips 66 Partners a wholly owned subsidiary. Results are not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Sales and operating revenue | $36.2 billion | $21.6 billion; up 67% |
| Net income attributable to Phillips 66 | $582 million; diluted EPS $1.29 | Net loss of $654 million; diluted loss per share $1.49 |
| Operating cash flow | $1.136 billion | $271 million |
| Capital expenditures and investments | $370 million | $331 million |
| Cash and cash equivalents | $3.335 billion at March 31 | $3.147 billion at December 31, 2021 |
| Total debt | $14.434 billion | $14.448 billion at December 31, 2021 |
| Debt to total capital | 39% | 40% at December 31, 2021 |
Management reported approximately $5.7 billion of available committed capacity under revolving credit facilities. No amount was drawn on Phillips 66’s $5 billion revolving facility or its commercial paper program at quarter-end. Common dividends paid were $404 million, or $0.92 per share.
Performance and changes versus prior year
- Refining: Segment pretax income was $123 million versus a $1.040 billion loss. Worldwide realized refining margin rose to $10.55 per barrel from $4.36, and utilization increased to 89% from 74%. Higher crack spreads, recovering demand, and less storm-related downtime contributed; the Alliance refinery shutdown reduced reported capacity.
- Chemicals: Pretax income increased to $396 million from $154 million, mainly on stronger Olefins and Polyolefins margins and higher sales volumes. CPChem utilization was 99% versus 79%; management also noted higher feedstock costs and a lower benchmark HDPE chain margin.
- Midstream: Pretax income was $242 million versus $76 million. Transportation and NGL results improved, while DCP Midstream earnings were slightly lower. Midstream results included a $158 million loss from the decline in NOVONIX’s fair value.
- Marketing and Specialties: Pretax income increased to $316 million from $290 million. Higher volumes and improved specialties results were partly offset by lower fuel margins as spot prices rose.
- Revenue and purchased crude oil and products each rose 67%, reflecting higher commodity prices and increased sales volumes. Equity earnings of affiliates increased by $400 million, substantially reflecting higher CPChem and WRB earnings.
Outlook, notable items, and risks
- Management cited recovering refined-product demand and wider crack spreads, with market disruption from the Russia-Ukraine conflict contributing to tighter supply. It said it would remain disciplined in capital allocation amid uncertainty from the conflict and lingering pandemic effects.
- No specific earnings or annual capital-spending guidance is provided in the supplied filing text. Management targeted at least $700 million in sustainable annual cost reductions by the end of a multi-year transformation.
- Management said it would prioritize debt reduction in 2022 as operating cash flows improve. The company announced plans to resume share repurchases in Q2 2022; $2.514 billion remained under its authorization at March 31.
- After quarter-end, Phillips 66 repaid $1.0 billion of senior notes and Phillips 66 Partners repaid a $450 million term loan in early April. An exchange offer covering about $3.5 billion of Phillips 66 Partners notes was announced; approximately $3.2 billion had been tendered by April 19.
- The Phillips 66 Partners merger exchanged approximately 42 million Phillips 66 shares for interests not already owned. It was accounted for as an equity transaction and reduced noncontrolling interests and treasury stock.
- Contingencies: Environmental accruals were $436 million. Phillips 66’s maximum potential Dakota Access contingent equity contribution was approximately $631 million at March 31; following a $650 million Dakota Access note repayment on April 1, this was expected to fall to approximately $467 million. The pipeline easement/EIS process remains unresolved, and potential support obligations could arise if operations cease and the venture lacks funds.
- Other exposures include lease residual-value guarantees totaling up to $735 million, joint-venture guarantees, environmental and legal matters, and RFS compliance costs. RIN expenses for wholly owned refineries were $152 million in Q1 2022; the company’s share of jointly owned refinery RIN expenses was $85 million.
- Commodity prices and refining, marketing, and chemical margins are volatile; other risks include demand, regulation and climate policy, operational disruptions, and joint-venture distribution decisions. The filing reported no material change in risk factors from the 2021 Form 10-K. The CEO announced an intended July 1, 2022 transition, with Mark Lashier expected to become CEO.
Important facts for investors to verify
- Whether refining margins and utilization, and affiliate contributions to cash flow, remain strong as commodity markets and demand change.
- How much of the reported earnings improvement is sustainable versus market recovery, the absence of the prior-year Liberty Pipeline impairment, and other period-specific effects.
- The impact of the $169 million unrealized NOVONIX investment loss and the $40 million benefit from LIFO inventory liquidation on reported results.
- Post-quarter debt repayments and the outcome and terms of the Phillips 66 Partners note exchange; distinguish these subsequent events from March 31 balances.
- Developments in the Dakota Access EIS and litigation, potential contribution obligations, and environmental, RIN, and other contingent costs.
- Progress against the $700 million annual cost-reduction target, debt-reduction priorities, and planned resumption of share repurchases.