Phillips 66 — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Results are unaudited. Phillips 66 operates in midstream, chemicals, refining, and marketing and specialties. The 2012 nine-month comparison includes the pre-April 30, 2012 downstream businesses of ConocoPhillips, so that period is not fully comparable with Phillips 66’s standalone results.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Sales and operating revenues | $44.2 billion | $42.9 billion | $128.7 billion | $135.5 billion |
| Net income attributable to Phillips 66 | $535 million | $1.599 billion | $2.900 billion | $3.416 billion |
| Diluted EPS | $0.87 | $2.51 | $4.65 | $5.37 |
| Operating cash flow | $1.949 billion | Not separately stated here | $5.130 billion | $2.991 billion |
Q3 revenue rose about 3%, while attributable earnings fell about 67%. Nine-month revenue declined about 5% and earnings fell about 15%. Refining was the principal earnings headwind: Q3 segment income was a $2 million loss versus $1.545 billion income a year earlier, as worldwide refining margin fell to $6.14 per barrel from $16.97. Calculated net margin was approximately 1.2% for Q3 2013 versus 3.7% for Q3 2012, and 2.3% versus 2.5% for the nine-month periods.
- Segment earnings, Q3 / nine months: Midstream $148 million / $348 million; Chemicals $262 million / $725 million; Refining $(2) million / $1.401 billion; Marketing and Specialties $240 million / $760 million; Corporate and Other $(113) million / $(334) million.
- Q3 refining weakness reflected lower market crack spreads and tighter crude differentials. Marketing and Specialties improved on higher marketing margins, including benefits from higher renewable identification number (RIN) values. Chemicals earnings increased with improved realized margins and the absence of certain prior-year costs and impairments.
- Nine-month operating cash flow increased year over year, with management citing favorable working-capital effects, inventory management, tax-payment timing, and higher affiliate distributions; lower refining margins partly offset those benefits. Investing cash flow was $53 million provided, including $1.188 billion of asset-sale proceeds. Financing cash use was $2.797 billion, including $1.602 billion in share repurchases, $1.015 billion in debt repayments, and $575 million in dividends.
Financial position, capital and liquidity
- At September 30, 2013, cash and equivalents were $5.942 billion; total debt was $6.156 billion, down from $6.974 billion at year-end 2012. Debt-to-capital was 22%, compared with 25% at year-end. Cash less debt was approximately negative $214 million.
- Current assets were $21.085 billion and current liabilities $14.680 billion. The company reported approximately $5.1 billion of available capacity under its credit and receivables facilities, with no direct borrowings under those facilities.
- Capital expenditures and investments were $1.170 billion for the first nine months. Management forecast 2014 capital spending of $2.5–$3.0 billion, excluding spending funded by equity affiliates.
- Phillips 66 Partners LP completed its IPO in July, generating $404 million net proceeds. Phillips 66 retained a 71.7% limited-partner interest and a 2.0% general-partner interest and consolidates the partnership.
- The quarterly dividend paid in September was $0.3125 per share. On October 2, the board declared a 25% increase to $0.39 per share. The initial $2 billion repurchase authorization was completed in October; a further $1 billion authorization had been approved.
Management commentary, outlook and material risks
- Management said results are highly sensitive to volatile refining and marketing margins, NGL and commodity prices, refinery operations, and distributions from equity affiliates; future affiliate distributions are not assured.
- RIN prices rose sharply during 2013 before easing by quarter-end. Management said the long-term effect of the Renewable Fuel Standard and the ability to pass RIN costs through to customers remain uncertain; failure to obtain sufficient RINs could materially harm results.
- Environmental accruals were $505 million at quarter-end. The company said it did not expect known contingencies to exceed accruals by an amount that would materially adversely affect the financial statements, but cleanup estimates and legal and tax exposures may change. It identified 37 unresolved sites with potential liability under CERCLA or comparable state laws.
- A $323 million pretax gain on the July sale of the Immingham power plant was deferred because of an indemnity to the buyer; recognition was expected to begin in the second half of 2014 if exposure declines and no claims arise. The May sale of E-Gas technology generated a $48 million pretax gain.
- The arbitration over the disputed exercise of a call right for the company’s interest in Merey Sweeny LP remained unresolved; a final ruling was expected in Q4 2013. A new U.S. Attorney matter concerned alleged Migratory Bird Treaty Act violations relating to bird deaths at a brine pond near the Borger refinery.
- The filing added a risk that Phillips 66’s control of the general partner of publicly traded Phillips 66 Partners could expose it to fiduciary-duty or conflicts-of-interest claims. Other disclosed risks include commodity and margin volatility, regulation, environmental liabilities, operating disruptions, and access to capital.
Important facts for investors to verify
- How much of the Q3 and nine-month earnings decline reflects ongoing refining margin and crude-differential pressure versus prior-year impairments and other comparison effects.
- Whether working-capital benefits, asset-sale proceeds, and affiliate distributions are repeatable sources of cash flow.
- The realized cost and pass-through of RIN obligations, and any regulatory developments affecting blending requirements.
- Developments in the Immingham sale indemnity and deferred gain, Merey Sweeny arbitration, environmental matters, and the Borger proceeding.
- Execution and funding of the stated 2014 capital-spending range, dividend increase, and additional share repurchase authorization.