Phillips 66 — Third Quarter 2014 Form 10-Q
Business context and reporting period. Phillips 66 is an energy manufacturing and logistics company with Midstream, Chemicals, Refining, and Marketing and Specialties (M&S) businesses. This unaudited filing covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods. Prior-period segment results were recast for a 2014 reporting realignment.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Sales and operating revenues | $40.417B | $44.146B | $126.249B | $128.547B |
| Income from continuing operations | $1.189B | $526M | $2.933B | $2.867B |
| Net income attributable to Phillips 66 | $1.180B | $535M | $3.615B | $2.900B |
| Diluted EPS | $2.09 | $0.87 | $6.28 | $4.65 |
| Dividends per share | $0.50 | $0.3125 | $1.39 | $0.9375 |
- Q3 earnings rose $645M, or 121%, primarily on higher realized refining margins as crude prices fell; results also included a $109M previously deferred gain on the 2013 sale of the Immingham power plant.
- Nine-month earnings increased $715M, or 25%. The period included a $696M noncash gain from the February 2014 PSPI share exchange; improved Chemicals margins also contributed. Discontinued operations contributed $706M, including the exchange gain.
- Q3 worldwide refining margin was $10.89 per barrel versus $5.94; the nine-month margin was $10.15 versus $9.70. Q3 refinery utilization was 94%, versus 95% a year earlier.
- Q3 segment earnings: Midstream $115M (down from $147M); Chemicals $230M (down from $262M); Refining $558M (versus a $30M loss); M&S $368M (up from $255M). Nine-month segment earnings were Midstream $411M, Chemicals $870M, Refining $1.254B, and M&S $667M.
- Q3 operating cash flow was $429M. Nine-month operating cash flow was $2.657B, down from $5.130B, chiefly reflecting inventory-related working-capital use. Nine-month capital expenditures and investments were $2.647B; dividends were $787M and share repurchases were $1.750B.
- Cash was $3.108B at September 30, down from $5.400B at year-end 2013. Total debt was $6.213B; debt-to-capital was 22%, within the company’s 20%–30% target range. Approximately $4.7B of revolving credit capacity was available, with no direct borrowings under the facilities.
Changes, outlook and principal risks
- Revenue fell 8% in Q3 and 2% year to date, mainly because prices for petroleum products, crude oil and NGL were lower. Purchased crude oil and products also declined. Operating expenses rose, largely from refinery turnaround and utility costs.
- Management forecast Q4 inventory reductions expected to increase operating cash flow by about $772M, approximately offsetting Q3’s inventory build cash use. This is a forecast, not a reported result.
- The company said it expected CPChem’s Port Arthur ethylene unit, shut after a localized July fire, to restart in late Q4 2014; the outage was expected to continue weighing on Q4 results.
- The Board declared a $0.50 quarterly dividend payable December 1, 2014, and management forecast annual double-digit dividend increases in 2015 and 2016. The 2014 planned capital budget was increased by $1.2B to support acquisitions and Midstream growth.
- In October 2014, Phillips 66 agreed to take 25% interests in the Dakota Access and Energy Transfer Crude Oil pipeline joint ventures. Its share of construction costs was estimated at approximately $1.2B, mainly in 2015–2016.
- Environmental accruals were $519M, compared with $492M at year-end 2013; the company expected substantial related spending over the next 30 years. Management said it considered material adverse impact from known contingencies remote, but environmental, legal and tax estimates remain sensitive to new information.
- Other key exposures include volatile refining, NGL and Chemicals margins; feedstock and product supply; project execution, permitting and regulation; operational disruptions; joint-venture decisions; and potential greenhouse-gas rules. No material changes to the prior annual report’s risk factors were reported.
- Other unusual items: the PSPI share exchange returned about 17.4M Phillips 66 shares to treasury; the Bantry Bay terminal was classified as held for sale with a $12M impairment. The company also disclosed a pending PDVSA petition to vacate an arbitration award concerning its MSLP ownership call right.
Important facts for investors to verify
- Whether Q4 inventory reductions occurred as forecast and improved operating cash flow.
- Timing and financial impact of the Port Arthur ethylene restart and other refinery turnaround activity.
- How much reported earnings growth reflects recurring operations versus the PSPI and Immingham gains.
- Refining and Chemicals margin trends, and the sensitivity of affiliate distributions and cash flow to commodity markets.
- Funding and spending schedule for the increased capital program and the approximately $1.2B pipeline joint-venture commitment, alongside dividend and repurchase plans.
- Developments in environmental, legal and tax contingencies, including the MSLP dispute and the company’s $519M environmental accrual.