Phillips 66 — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; filed February 24, 2021. Phillips 66 is an integrated energy manufacturing and logistics company with Midstream, Chemicals, Refining, and Marketing and Specialties segments. The filing also provides fourth-quarter results.
Financial performance
| Metric | 2020 | 2019 |
|---|---|---|
| Sales and other operating revenues | $64.1 billion | $107.3 billion |
| Income (loss) before income taxes | $(5.0) billion | $4.2 billion |
| Net income (loss) attributable to Phillips 66 | $(4.0) billion | $3.1 billion |
| Diluted earnings (loss) per share | $(9.06) | $6.77 |
| Net cash provided by operating activities | $2.1 billion | $4.8 billion |
| Capital expenditures and investments | $2.9 billion | $3.9 billion |
| Cash and cash equivalents at year-end | $2.5 billion | $1.6 billion |
| Total debt at year-end | $15.9 billion | $11.8 billion |
| Total debt to capital | 42% | 30% |
Revenue fell 40%, with lower prices and volumes for crude oil and refined products amid the COVID-19 demand shock. The company recorded $4.3 billion of impairments, including a $1.845 billion Refining goodwill impairment, a $1.030 billion charge related to the San Francisco refinery reconfiguration, and a $1.161 billion impairment of its DCP Midstream investment. A $1.250 billion income tax benefit, including a CARES Act loss carryback benefit, partly offset the pretax loss.
Worldwide refining utilization was 76%, down from 94%; crude processed averaged 1.677 million barrels per day versus 2.043 million. Realized refining margin declined to $3.51 per barrel from $9.91. Segment pretax results were: Midstream loss of $9 million (2019 income of $684 million); Chemicals income of $635 million ($879 million); Refining loss of $6.155 billion ($1.986 billion income); and Marketing and Specialties income of $1.446 billion ($1.433 billion).
Liquidity included $2.5 billion cash and approximately $5.3 billion of available committed credit capacity. Phillips 66 issued approximately $3.75 billion of senior notes and borrowed under a term loan during 2020; total debt rose by about $4.1 billion net. The company paid $1.575 billion in common dividends and repurchased $443 million of shares before suspending repurchases in March. A $1.5 billion income tax receivable was expected to be refunded within 12 months. The Board declared a $0.90-per-share quarterly dividend in February 2021.
Material changes and notable items
- The pandemic sharply reduced demand, refining margins, refinery output and cash generation; operating cash flow declined 56% year over year.
- Cost reductions exceeded the company’s $500 million target, and operating expenses declined 10%.
- Midstream activity included full operations at Gray Oak Pipeline and startup of two Sweeny Hub fractionators. Red Oak was canceled; Liberty Pipeline and Sweeny Frac 4 were deferred.
- Phillips 66 announced Rodeo Renewed to convert the San Francisco refinery to renewable fuels. The first renewable diesel unit was expected to start in mid-2021; full conversion was targeted for early 2024, with expected capacity above 50,000 barrels per day.
Outlook, risks and contingencies
Management set a 2021 capital budget of approximately $1.7 billion, excluding the company’s share of planned spending by major joint ventures. Priorities include sustaining investment, completing committed and optimization projects, advancing renewable fuels, maintaining the dividend, and reducing debt as cash flows recover. Management stated that the depth and duration of the pandemic’s economic effects were unknown and warned that further impairments could be required. The filing does not provide a clear numerical earnings or margin forecast.
Key risks include continued weak product demand and volatile commodity prices and refining margins; operational outages and severe weather; environmental and climate regulation, renewable-fuel requirements and RIN costs; project delays or cost overruns; joint-venture and counterparty exposure; and access to capital and investment-grade ratings. Dakota Access litigation creates uncertainty over the Lake Oahe easement and potential operations. Phillips 66 Partners’ maximum potential contribution under the related contingent equity undertaking was approximately $631 million; a shutdown could also expose it to a share of ongoing costs. The company reported $427 million of accrued environmental costs and expected annual expensed environmental costs of about $720 million in 2021 and 2022. A Los Angeles refinery penalty demand of $2.7 million was being addressed; management did not expect the disclosed legal matters, individually or together, to have a material adverse effect.
Ernst & Young issued an unqualified opinion on the financial statements and internal controls; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether demand recovery improves refining margins, utilization and operating cash flow, and whether additional impairments occur.
- Debt repayment progress, credit ratings and the company’s capacity to sustain dividends while funding capital needs.
- Regulatory and court developments affecting the Dakota Access Pipeline, including potential shutdown and contingent funding exposure.
- Rodeo Renewed’s schedule, costs, financing and expected renewable-fuel capacity, and whether the stated 2021 capital program remains on track.
- The timing and receipt of the expected $1.5 billion tax refund and the impact of environmental compliance and remediation costs.