Phillips 66 — Q1 2020 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. Phillips 66 operates in Midstream, Chemicals, Refining, and Marketing and Specialties. Results were hit by COVID-19-related demand declines and the crude-oil supply dispute between Russia and OPEC.
Financial performance
- Revenue: $20.878 billion, down 10% from $23.103 billion. Lower prices for refined products, crude oil, and NGLs drove the decline.
- Profit: Net loss attributable to Phillips 66 was $2.496 billion, or $5.66 per diluted share, versus net income of $204 million, or $0.44 per share, a year earlier. The quarter included $3.006 billion of impairments: $1.845 billion of Refining goodwill and $1.161 billion on the DCP Midstream investment.
- Cash flow: Operating cash flow was $217 million, versus cash used of $478 million in Q1 2019; management attributed the improvement mainly to working-capital movements. Capital expenditures and investments were $923 million. Cash declined $393 million to $1.221 billion.
- Margins and segments: Refining reported a $2.261 billion pretax loss, including the goodwill impairment; worldwide realized refining margin was $7.11 per barrel versus $7.23. Midstream recorded a $702 million pretax loss, primarily reflecting the DCP impairment. Chemicals pretax income fell to $169 million from $227 million. Marketing and Specialties pretax income rose to $513 million from $205 million, mainly on higher realized fuel margins.
- Debt and liquidity: Total debt was $12.963 billion at March 31, up from $11.763 billion at year-end; debt-to-capital increased to 35% from 30%. Cash was $1.221 billion, and approximately $5.7 billion of committed revolving-facility capacity was available. The company had also borrowed $1 billion under a 364-day term facility and $200 million under its commercial-paper program.
- Equity and distributions: Total equity was $23.639 billion, down from $27.169 billion at year-end. The company paid $396 million in common dividends, or $0.90 per share, and repurchased $443 million of stock during the quarter.
Material changes and management actions
- Compared with Q1 2019, Phillips 66 swung from attributable net income of $204 million to a $2.496 billion loss. Management cited impairments, lower refinery production, and lower affiliate earnings; higher marketing margins and improved NGL results partly offset these effects.
- In response to market disruption, the company suspended share repurchases in mid-March, reduced 2020 consolidated capital-spending plans by $700 million to $3.1 billion, and announced a $500 million operating and administrative cost-reduction plan.
- After quarter-end, the term facility was increased to $2 billion, with $1 billion undrawn; Phillips 66 issued $1 billion of senior notes. It also repaid $500 million of its own April-maturity debt and Phillips 66 Partners repaid $25 million of bonds.
- Gray Oak Pipeline began full operations from West Texas to Gulf Coast destinations on April 1; its Eagle Ford segment started later in April. Several pipeline and midstream projects were deferred, and Phillips 66 Partners postponed its ACE Pipeline final investment decision.
Outlook, risks, and contingencies
- Management said near-term demand, prices, margins, and volumes remained highly uncertain, and expected COVID-19’s adverse effects to continue in Q2 and likely remain significant in the near term. The filing provides no specific earnings guidance.
- Management expected reduced refinery production and challenged refining, marketing, chemical margins, transportation volumes, and affiliate distributions if economic disruption persisted. DCP Midstream announced capital and cost reductions, including a 75% reduction in growth capital.
- Credit risk increased as commodity prices and demand weakened. The company enhanced counterparty monitoring and sought collateral or prepayments from higher-risk counterparties.
- Environmental accruals were $442 million. Other exposures include lease residual-value guarantees of up to $916 million in aggregate, the Gray Oak loan contribution exposure of $583 million, and Phillips 66 Partners’ potential Dakota Access contribution of approximately $631 million. These are contingent exposures, not necessarily expected payments. Dakota Access litigation had no immediate operating impact at quarter-end, but a possible pipeline shutdown remained under review.
- Management stated that known contingent liabilities were not expected to have a material adverse effect based on information available, while noting estimates for environmental, legal, and tax matters can change. The COVID-19 risk factor highlights potential effects on operations, customers, suppliers, counterparties, and cash flows.
Important facts for investors to verify
- Whether demand recovery and product margins improve, and how that affects refinery utilization, production, and operating cash flow.
- Whether planned cost reductions and lower capital spending are achieved, and whether deferred projects return to schedule.
- Liquidity, debt levels, borrowing costs, and the capacity to fund dividends, capital needs, and maturities if operating cash generation remains weak.
- Whether the DCP Midstream and Refining impairments signal further valuation pressure, and whether inventory write-downs or affiliate impairments arise.
- Developments in Dakota Access permitting litigation, Gray Oak operations and financing, and environmental or other contingent liabilities.