Phillips 66 — Form 10-Q Summary
Reporting period: Unaudited quarter ended March 31, 2014. Comparisons are with the first quarter of 2013 unless stated otherwise. Prior-period segment information was recast to reflect the company’s 2014 segment realignment.
Financial performance
- Revenue: $40.283 billion, down 2% from $41.211 billion.
- Net income attributable to Phillips 66: $1.572 billion, up 12% from $1.407 billion. Diluted EPS was $2.67 versus $2.23.
- Continuing operations: Income attributable to Phillips 66 was $866 million, down from $1.392 billion; diluted EPS was $1.47 versus $2.21. The reported increase in total earnings was principally due to the PSPI transaction, not stronger continuing results.
- PSPI disposition: The February 25 exchange generated a $696 million pretax gain and approximately 17.4 million Phillips 66 treasury shares. Discontinued operations contributed $706 million of net income.
- Operating cash flow: $1.398 billion, down from $2.213 billion. Management cited lower refining margins and reduced distributions from CPChem, partly offset by higher WRB distributions. Working-capital movements were also significant.
- Capital allocation: Capital expenditures and investments were $572 million; common dividends were $229 million; share repurchases were $640 million. Cash and cash equivalents declined $74 million to $5.326 billion.
- Margins and segments: Worldwide refining margin was $9.88 per barrel versus $13.78. Refining earnings fell to $306 million from $904 million. Midstream earnings rose to $188 million from $111 million; Chemicals rose to $316 million from $282 million; Marketing and Specialties declined to $137 million from $190 million.
Balance sheet and liquidity
- Total debt was $6.217 billion, versus $6.155 billion at year-end 2013; debt-to-capital remained 22%, within management’s 20%–30% target range. Cash exceeded reported debt by approximately $891 million.
- Phillips 66 reported $5.4 billion of available capacity under its credit and receivables facilities, with no direct borrowings under those facilities. The company also reported $5.326 billion of cash.
- Total assets were $50.847 billion and total equity was $21.829 billion. Current assets were $21.059 billion and current liabilities were $15.164 billion.
- The company classified $800 million of debt due within a year as long-term, citing its intent and ability to refinance it on a long-term basis.
Changes, outlook and risks
- Management attributed weaker refining results to lower realized margins, narrower crude differentials, maintenance and turnaround costs, and higher utility costs. Worldwide refinery utilization was 90%, unchanged year over year.
- Midstream benefited from higher NGL and natural gas prices and stronger transportation and NGL earnings. Chemicals benefited from improved polyethylene margins and lower turnaround costs, partly offset by higher utility costs.
- The filing provides no specific company-wide earnings or margin guidance. Management said available cash, operating cash generation and external funding access were expected to meet near- and long-term funding needs, while cautioning that operating cash flow depends on volatile commodity prices, margins, refinery operations and affiliate distributions.
- Environmental accruals were $488 million, with expenditures expected over an extended period. The company also disclosed legal and environmental contingencies, guarantees, and exposure to changing environmental and climate-related regulation. Management said it did not expect known contingencies to have a material adverse effect based on information then available.
- Key risks include commodity-price and margin volatility; operational, maintenance and project risks; transportation constraints; regulation and environmental liabilities; and decisions by joint ventures. Management reported no material change to the risk factors in its 2013 Form 10-K.
Important facts for investors to verify
- How much of first-quarter earnings growth reflects the one-time PSPI exchange gain, and how continuing earnings perform without it.
- Whether refining margins and affiliate distributions recover, given their importance to earnings and operating cash flow.
- The basis and refinancing plan for the $800 million of debt classified as long-term despite being due within a year.
- The sustainability of share repurchases and dividends relative to cash generation, capital spending and potential affiliate distributions.
- Potential changes to environmental, legal and guarantee exposures, including the $488 million environmental accrual and the $214 million MSLP debt guarantee.