Phillips 66 — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Phillips 66 operates in Midstream, Chemicals, Refining, and Marketing and Specialties; Chemicals and certain other operations are conducted through equity affiliates. Figures are U.S. dollars unless noted.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Sales and other operating revenues | $107.293 billion | $111.461 billion |
| Income before income taxes | $4.178 billion | $7.445 billion |
| Net income attributable to Phillips 66 | $3.076 billion | $5.595 billion |
| Diluted earnings per share | $6.77 | $11.80 |
| Cash from operating activities | $4.808 billion | $7.573 billion |
| Capital expenditures and investments | $3.873 billion | $2.639 billion |
| Cash and cash equivalents at year-end | $1.614 billion | $3.019 billion |
| Total debt | $11.763 billion | $11.160 billion |
- Revenue declined about 4%; Phillips 66 earnings fell 45%. Income tax expense was $801 million, versus $1.572 billion in 2018.
- Fourth-quarter 2019 revenue was $29.125 billion, pretax income $1.066 billion, net income attributable to Phillips 66 $736 million, and diluted EPS $1.64. In fourth-quarter 2018, those measures were $29.098 billion, $2.918 billion, $2.240 billion, and $4.82, respectively.
- Worldwide refining crude capacity utilization was 94%, versus 95% in 2018. Realized refining margin was $9.91 per barrel, down from $12.99.
- Debt was 30% of total debt plus equity, compared with 29% in 2018. Approximately $5.7 billion of committed revolving-credit capacity was available at year-end; no borrowings were outstanding under the company’s revolving facility or commercial-paper program at that date.
- Cash dividends paid were $1.570 billion; the annual dividend declared per share rose to $3.50 from $3.10. Share repurchases were $1.650 billion. The company ended 2019 with approximately 439.4 million shares outstanding as of January 31, 2020.
Material changes and drivers
- Refining: Pretax income fell to $1.986 billion from $4.535 billion, primarily because of lower realized margins, narrowing heavy-crude differentials, and turnaround activity and unplanned downtime at certain refineries.
- Midstream: Pretax income decreased to $684 million from $1.181 billion, including an $853 million pretax impairment of the DCP Midstream investment. Transportation and NGL and Other results improved, supported by higher volumes, tariffs, margins, and affiliate earnings.
- Chemicals: Pretax income fell to $879 million from $1.025 billion. Lower polyethylene margins reflected new capacity, trade-policy uncertainty, and slower Asian demand growth; inventory write-downs reduced Phillips 66’s equity earnings by $65 million.
- Marketing and Specialties: Pretax income declined to $1.433 billion from $1.557 billion, mainly due to weaker international marketing fuel margins, partly offset by higher sales volumes.
- Operating cash flow fell 37%, reflecting weaker refining margins, lower affiliate distributions, and unfavorable working-capital effects. Cash used for investing and financing included $3.873 billion of capital spending, $1.650 billion of repurchases, and $1.570 billion of dividends.
Outlook, risks, and contingencies
- The 2020 capital budget is $3.790 billion, including $469 million expected to be funded by joint-venture partners; planned self-funded spending by major equity affiliates is about $1.2 billion. The budget prioritizes Midstream growth, refinery reliability and yield projects, renewable diesel projects, and retail and technology investments.
- Management forecast that the quarterly dividend would continue to increase in 2020. In February 2020, the board declared a quarterly dividend of $0.90 per share. A new $3 billion repurchase authorization was approved in October 2019; repurchases remain discretionary.
- Key projects include the Sweeny Hub fractionators and storage expansions, the Gray Oak Pipeline and export infrastructure, and the Red Oak and Liberty pipelines. Timing, costs, permits, shipper commitments, and market conditions could affect completion and returns.
- Results remain exposed to volatile crude, NGL, refined-product and chemical prices and margins; refinery outages; affiliate distribution decisions; and the availability and cost of transportation. The filing also highlights environmental and climate regulation, renewable-fuel obligations and RIN costs, extreme weather, cyber incidents, and political or permitting uncertainty.
- Environmental remediation accruals were $441 million at year-end. Environmental costs expensed in 2019 were $691 million; the company expected approximately $765 million in 2020 and $760 million in 2021. Phillips 66 reported 27 unresolved sites with potential liability under CERCLA or comparable laws.
- Potential contingent exposures include Phillips 66 Partners’ share of up to approximately $631 million under the Dakota Access contingent equity undertaking and $494 million of exposure at year-end under the Gray Oak loan guarantee, subject to stated conditions. The filing also reports $263 million of other joint-venture guarantees and a $554 million maximum exposure under the headquarters lease residual-value guarantee. The company stated it did not expect known contingencies, based on available information, to have a material adverse effect.
- The company reported an unqualified audit opinion and effective internal control over financial reporting as of December 31, 2019.
Important facts for investors to verify
- Whether refining margins, crude differentials, and refinery reliability improve or weaken from 2019 levels.
- The assumptions and valuation supporting the DCP Midstream impairment, and the subsequent operating and market performance of the investment.
- Delivery, funding, and expected returns for the 2020 capital program and major Midstream projects.
- Cash generation and liquidity after dividends, repurchases, capital spending, debt maturities, and affiliate distributions.
- Potential changes in environmental, climate, and renewable-fuel requirements, including related compliance costs and any material developments in disclosed legal matters or guarantees.