Phillips 66 — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts are U.S. dollars unless otherwise stated.
Business context
Phillips 66 is an energy manufacturing and logistics company with four operating segments: Midstream, Chemicals, Refining, and Marketing and Specialties (M&S). Chemicals, DCP Midstream, and WRB Refining include significant equity-method joint ventures. The company reported approximately 14,800 employees at year-end.
Financial performance and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Sales and other operating revenues | $84.3 billion | $99.0 billion |
| Income from continuing operations attributable to Phillips 66 | $1.555 billion | $4.227 billion |
| Diluted EPS from continuing operations | $2.92 | $7.73 |
| Cash from operating activities | $2.963 billion | $5.713 billion |
| Capital expenditures and investments | $2.844 billion | $5.764 billion |
| Cash and cash equivalents at year-end | $2.711 billion | $3.074 billion |
| Total debt | $10.138 billion | $8.887 billion |
| Debt to capital | 30% | 27% |
| Dividends declared per share | $2.45 | $2.18 |
Cash from operations covered the company’s $2.844 billion of capital expenditures and investments, but not the combined spending on dividends and buybacks. Phillips 66 reported approximately $5.5 billion of capacity under its and Phillips 66 Partners’ liquidity facilities. Its $5 billion revolving credit facility was undrawn at year-end, apart from $51 million of letters of credit; Phillips 66 Partners had $210 million drawn on its facility.
Material changes versus 2015
- Continuing-operations earnings fell 63%, principally on weaker refining and olefins/polyolefins margins and the absence of a $242 million deferred gain recognized in 2015.
- Refining earnings declined to $374 million from $2.555 billion. Worldwide refining margin fell to $6.99 per barrel from $11.84, while crude capacity utilization improved to 96% from 91%.
- Chemicals earnings declined 39% to $583 million, reflecting lower O&P margins, increased turnaround activity, lower affiliate earnings and an $89 million after-tax share of an affiliate impairment.
- Midstream earnings rose to $178 million from $13 million, largely reflecting improved DCP Midstream results, including the comparison with 2015 impairments. M&S earnings decreased 25% to $891 million, including the absence of the prior-year deferred gain.
- Revenue declined 15%, mainly due to lower average crude oil and petroleum product prices. Operating cash flow fell 48%, reflecting weaker refining margins and lower equity-affiliate distributions, partly offset by a favorable working-capital contribution.
Outlook, commentary, risks and unusual items
- Management budgeted $2.7 billion of 2017 company capital expenditures and investments, plus an expected $1.1 billion share of spending by DCP Midstream, CPChem and WRB. Including those joint-venture amounts, the indicated 2017 program was approximately $3.8 billion.
- Management expected CPChem’s Gulf Coast ethane cracker and polyethylene project to progress to completion in 2017: polyethylene units by mid-year and the cracker in the fourth quarter. The Freeport LPG export terminal became fully operational and loaded its first cargoes in December 2016.
- The DAPL easement beneath the Missouri River was granted on February 8, 2017, after year-end construction delays; the pipeline was expected to be operational by mid-2017. The filing also reports that DAPL/ETCOP sponsor loans were repaid in February 2017.
- After legal challenges to the 2009 call-right exercise expired in February 2017, Phillips 66 began consolidating its acquired interest in MSLP. The company expected a noncash, pretax gain of approximately $420 million in first-quarter 2017, based on a preliminary appraisal.
- Key risks include volatile commodity prices and refining, marketing and petrochemical margins; environmental and renewable-fuel requirements, including RIN costs; project construction and permitting; operational, weather and cyber disruptions; and the timing of distributions from equity affiliates. Management described known contingent exposures as unlikely to exceed accruals by a material amount, but estimated remediation, tax and legal costs may change.
- Year-end accrued environmental costs were $496 million. The company identified 31 unresolved U.S. sites with potential CERCLA or comparable state-law liability. Reported proceedings included air and wastewater matters; management expected no material consolidated financial-position effect from the reported proceedings.
- Phillips 66 repurchased $1.0 billion of stock and paid $1.3 billion in dividends during 2016. The board’s aggregate repurchase authorization was up to $9 billion; approximately $1.6 billion remained available at year-end under the then-current program disclosures.
Most important facts for investors to verify
- Whether refining and chemical margins recover, and how further changes affect segment earnings and operating cash flow.
- Whether 2017 project schedules, costs and returns—including the CPChem expansion, Beaumont growth projects and DAPL—match management’s expectations.
- Debt and liquidity trajectory, including Phillips 66 Partners’ financing needs, distributions from equity affiliates, and the balance between investment, dividends and repurchases.
- The effect of renewable-fuel compliance, environmental obligations and legal matters on future cash costs; also monitor changes in the $496 million environmental accrual.
- Whether the preliminary MSLP valuation and expected $420 million noncash gain are confirmed in subsequent reporting, and how the transaction affects reported results.