Phillips 66 — Form 10-Q Summary
Business context and reporting period
Phillips 66 is an energy manufacturing and logistics company operating in Midstream, Chemicals, Refining, and Marketing and Specialties. This unaudited filing covers the three months ended March 31, 2015; comparisons are with the first quarter of 2014 unless otherwise noted. Management cautions that quarterly results are not necessarily indicative of full-year results.
Key financial and operating metrics
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Sales and operating revenues | $22.778 billion | $40.283 billion, down 43% |
| Income from continuing operations attributable to Phillips 66 | $987 million | $866 million, up 14% |
| Net income attributable to Phillips 66 | $987 million | $1.572 billion, including $706 million from discontinued operations |
| Diluted EPS | $1.79 | $2.67, including $1.20 from discontinued operations |
| Cash from operating activities | $1.352 billion | $1.398 billion |
| Capital expenditures and investments | $1.081 billion | $572 million |
| Cash and cash equivalents, March 31 | $5.390 billion | $5.207 billion at December 31, 2014 |
| Total debt, March 31 | $8.949 billion | $8.684 billion at December 31, 2014 |
| Total debt to capital | 28% | 28% at December 31, 2014 |
Cash from operations funded $1.081 billion of capital spending and investments, $272 million of dividends, $399 million of share repurchases, and debt repayments. Cash increased $183 million during the quarter. The company reported approximately $5.4 billion of available capacity under its credit facilities; it had no commercial-paper borrowings and no direct borrowings under its $5 billion revolving facility.
Worldwide refining margin was $12.26 per barrel, compared with $9.88, while refinery capacity utilization fell to 84% from 90%. Dividends paid were $0.50 per share, versus $0.39. The effective tax rate was 28%, compared with 33%.
Material changes and segment performance
- Lower petroleum, crude oil, and NGL prices drove the 43% decline in sales and the 51% decline in purchased crude oil and products.
- Refining earnings rose to $538 million from $306 million, principally on improved realized margins and crack spreads; higher turnaround activity and unplanned downtime reduced utilization.
- Marketing and Specialties earnings increased to $304 million from $137 million, aided by improved marketing conditions and a $110 million gain recognized from the previously deferred Immingham plant sale gain.
- Midstream earnings declined to $67 million from $188 million, mainly reflecting lower commodity prices and weaker DCP Midstream and NGL results.
- Chemicals earnings fell to $203 million from $316 million, primarily because of lower ethylene margins, lower Middle East affiliate earnings, and higher turnaround costs.
- Corporate and Other loss widened to $125 million from $81 million, including higher net interest costs.
Q1 2014 net income included a $696 million pretax noncash gain from the Phillips Specialty Products share exchange, reported in discontinued operations. The 2015 increase in continuing earnings also included the $110 million partial recognition of the deferred Immingham sale gain; the company expected to recognize the remaining $132 million in Q2 2015. Inventory LIFO liquidations reduced Q1 2015 net income by approximately $36 million.
Outlook, management commentary, and risks
- Management forecast annual double-digit dividend-rate increases in 2015 and 2016. No other specific earnings or operating guidance is provided in the filing.
- Management stated that cash and expected operating cash flow, together with access to external financing, should be sufficient for planned spending, dividends, benefit contributions, debt repayment, and share repurchases. It targets an adjusted debt-to-capital ratio of 20%–30%, excluding Phillips 66 Partners’ impact; the reported adjusted ratio was 26% at quarter-end.
- Phillips 66 Partners issued $1.1 billion of notes and $384 million of common units, and acquired the company’s interests in three pipeline ventures for $1.010 billion in total consideration. Phillips 66 retained control and consolidated the partnership.
- Key exposures include volatile crude oil, NGL, natural gas, refining, and chemicals prices and margins; refinery operating interruptions and maintenance; affiliate distribution decisions; project execution, permitting, and transportation availability; and changing environmental, climate, tax, and other regulation.
- Environmental accruals were $480 million at March 31, down from $496 million at year-end; the company expects a substantial portion of related spending over the next 30 years. Management said known contingent exposures were not expected to have a material adverse effect based on currently available information, while noting estimation uncertainty.
- Other matters include a $189 million guarantee of Merey Sweeny debt, environmental and other indemnifications, and litigation. The company said no new reportable legal proceedings arose during the quarter and no material risk-factor changes occurred.
Important facts for investors to verify
- How much of the continuing-earnings improvement reflects sustainable refining and marketing performance versus the one-time recognition of the Immingham gain?
- Whether refining margins and utilization, and DCP Midstream and Chemicals results, recover or weaken as commodity prices and market conditions change.
- How planned capital spending, dividends, buybacks, and the partnership’s financing affect debt, liquidity, and cash generation.
- Whether the remaining $132 million Immingham deferred gain was recognized as expected in Q2 2015, and how much environmental and other contingency costs ultimately require cash payments.
- Whether affiliate distributions, including from WRB, DCP Midstream, and CPChem, resume at levels that support operating cash flow.