Phillips 66 — Second Quarter 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The filing is unaudited. Phillips 66 became independent on April 30, 2012; 2012 comparative results include pre-separation combined-business periods and are not fully like-for-like.
Business context and results
Phillips 66 operates in Midstream, Chemicals, Refining, and Marketing and Specialties. Effective January 1, 2013, it changed segment reporting, with prior periods recast for comparison.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $43.24bn | $46.75bn | $84.50bn | $92.53bn |
| Net income attributable to Phillips 66 | $958m | $1.181bn | $2.365bn | $1.817bn |
| Diluted EPS | $1.53 | $1.86 | $3.76 | $2.86 |
| Operating cash flow | $968m | Not stated clearly for Q2 | $3.181bn | $1.073bn |
Quarterly earnings declined 19%, primarily from lower refining margins, weaker product differentials, and narrower feedstock advantages. First-half earnings rose 30%, reflecting improved Refining and Marketing and Specialties results and lower impairments. Revenue and purchased crude oil and products fell mainly because petroleum, crude oil, and NGL prices were lower.
Segments, margins, and unusual items
- Refining: Q2 earnings were $481m, down from $916m. Worldwide refining margin was $9.88 per barrel versus $12.85; utilization was 94% versus 93%. First-half earnings rose to $1.403bn from $1.309bn.
- Marketing and Specialties: Q2 earnings increased to $332m from $252m; first-half earnings rose to $520m from $240m. Higher margins and lower costs helped, with RIN-related values contributing to margins.
- Midstream: Q2 earnings were $90m versus a $75m loss, mainly due to improved Transportation results and lower prior-year impairments. Lower NGL prices weighed on DCP Midstream.
- Chemicals: Q2 earnings declined to $181m from $207m, affected by unplanned outages, extended turnarounds, lower volumes and higher costs. First-half earnings increased to $463m from $424m.
- Q2 2012 included a $189m pre-tax gain on the Trainer refinery sale. First-half 2013 included a $40m pre-tax gain on the E-Gas technology sale and $25m of impairments, versus $318m of impairments in first-half 2012, including a $275m pipeline investment impairment.
Cash, debt, and liquidity
- At June 30, cash was $4.220bn, total debt $6.469bn, and total equity $21.690bn. Debt-to-capital was 23%, down from 25% at year-end 2012; floating-rate debt was 9% of total debt.
- First-half operating cash flow was $3.181bn; capital expenditures and investments were $758m. Cash uses included $928m of share repurchases, $386m of dividends, and $505m of debt repayment. Cash increased $746m during the half.
- Available capacity under the company’s revolving credit and receivables facilities was approximately $5.0bn; neither facility had direct borrowings at quarter-end. The credit line was increased to $4.5bn and extended to June 2018; receivables-facility capacity was reduced to $696m.
- The company prepaid $500m of term debt in June and expected to repay the remaining $500m, due in 2015, before year-end 2013. The quarterly dividend was $0.3125 per share.
Outlook, risks, and contingencies
- No quantified earnings or operating guidance was provided. Management said current cash, operating cash flow, and external funding access should meet near- and long-term requirements. It expected about $1bn of asset-sale proceeds in Q3 2013; approximately $325m of related pre-tax gain was to be deferred until late 2014 and early 2015 due to indemnities.
- RIN prices rose sharply during the first half, peaking at about $1.10 per gallon of ethanol. Management said the effect of the renewable-fuel mandate and the ability to recover RIN costs in fuel prices remained uncertain and could adversely affect refining margins.
- Key sensitivities include volatile crude, NGL, natural gas, refining and chemical margins; refinery outages, maintenance and feedstock availability; environmental regulation; and joint-venture decisions and distributions.
- Environmental accruals were $504m at quarter-end, expected to be spent substantially over the next 30 years. Management stated known contingencies were not expected to have a material adverse effect, while noting estimates could change.
- A dispute with PDVSA over the MSLP ownership call right remained in arbitration; a final ruling was expected in the second half of 2013. Phillips 66 guaranteed $224m of MSLP debt. The filing also describes other guarantees and indemnities, including a $265m recorded carrying amount for indemnifications.
- Phillips 66 Partners completed its IPO on July 26, 2013, raising estimated net proceeds of $405m. Phillips 66 retained a 71.7% limited partner interest and a 2.0% general partner interest and expected to consolidate the partnership.
Investor verification priorities
- Assess the comparability of reported 2012 results given the April 2012 separation and associated allocations.
- Track refining margins, particularly Gulf Coast and Central Corridor performance, and the pass-through of RIN costs.
- Reconcile first-half operating cash flow, including working-capital movements, affiliate dividends, and the approximately $350m estimated-tax payment benefit recognized in Q2 cash flow.
- Confirm the timing and proceeds of expected asset sales, the deferred gain, and repayment of the remaining term loan.
- Monitor the MSLP arbitration, environmental and other indemnity exposures, and the contribution of Phillips 66 Partners to future results and liquidity.