Phillips 66 — Form 10-Q Summary
Business context and reporting period
Phillips 66 reported unaudited results for the three months ended March 31, 2013. Its businesses comprise Midstream, Chemicals, Refining, and Marketing and Specialties. The 2012 comparison reflects the combined downstream businesses of ConocoPhillips before Phillips 66’s April 30, 2012 separation; pre-separation corporate cost allocations may not equal costs as a standalone company. Segment results were recast for a January 2013 reporting realignment.
Financial performance and condition
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Revenue | $41.263 billion | $45.783 billion |
| Net income attributable to Phillips 66 | $1.407 billion | $636 million |
| Diluted EPS | $2.23 | $1.00 |
| Cash from operating activities | $2.213 billion | $(361) million |
| Capital expenditures and investments | $387 million | $218 million |
| Cash and cash equivalents | $4.753 billion | $3.474 billion at Dec. 31, 2012 |
| Total debt | $6.971 billion | $6.974 billion at Dec. 31, 2012 |
| Total equity | $21.378 billion | $20.806 billion at Dec. 31, 2012 |
Revenue declined 10%, primarily because of lower petroleum, crude oil, and NGL prices. Net income attributable to the company rose 121%; reported income before tax was $2.081 billion and the effective tax rate was 32%, compared with 40% a year earlier. The company paid a $0.3125-per-share dividend and repurchased 6.4 million shares for $382 million during the quarter.
Worldwide refining margin was $13.94 per barrel, versus $10.39. Refining segment earnings increased to $922 million from $393 million; Marketing and Specialties earnings were $188 million versus a $12 million loss; Chemicals earnings rose to $282 million from $217 million. Midstream earnings were $110 million versus $108 million. Corporate and Other recorded a $95 million loss, compared with a $70 million loss.
Operating cash flow improved substantially, helped by stronger refining and marketing margins, increased affiliate distributions, and working-capital movements. Inventory builds used $2.442 billion of cash, partly offset by higher accounts payable. Cash from operations included $1.116 billion of dividends from equity affiliates; the company cautioned that future affiliate distributions are not assured.
At March 31, current assets were $21.170 billion and current liabilities were $14.951 billion. Debt was 25% of debt plus equity, within management’s stated 20%–30% target range. The company reported no direct borrowings under its $4.0 billion revolving credit facility or $1.2 billion receivables facility; after letters of credit, aggregate capacity available was approximately $5.0 billion.
Material changes, outlook, and risks
- Management attributed improved earnings chiefly to higher refining margins, improved marketing margins, and better Chemicals results. Worldwide refining utilization was 90%, down from 91%, with scheduled maintenance and unplanned downtime contributing.
- Management said available cash, operating cash generation, and external funding access should meet near- and long-term needs. It expected to repay the remaining $1.0 billion term loan before year-end 2013; the loan was due in 2014. No specific earnings or revenue guidance was provided in the supplied filing text.
- Management expected CPChem to remain self-funding through 2013. Capital spending included refinery emissions, reliability, and upgrade projects and investments in retail sites and growth initiatives.
- Renewable Identification Number (RIN) prices rose sharply during the quarter, from less than $0.10 to a peak of about $1.10 per ethanol gallon. The impact on refining margins and the extent to which costs can be passed through were uncertain. Failure to obtain sufficient RINs or comply with renewable-fuel requirements could materially harm results.
- Results and cash flows remain sensitive to volatile refining, marketing, chemicals, and NGL margins and prices; refinery operating performance; working capital; and equity-affiliate decisions. The company cited possible disruptions, regulatory and environmental obligations, and changes in demand and supply among its broader risks.
- Environmental accruals were $515 million, down from $530 million at year-end; substantial spending may occur over the next 30 years. The company said known contingencies were not expected to exceed accruals by an amount materially adverse to consolidated financial statements, while noting estimates can change.
- Phillips 66 guaranteed $233 million of MSLP debt. A dispute with PDVSA over the exercise of a call right for MSLP ownership remained in arbitration; the company expected a final ruling in the third quarter of 2013.
- Unusual items included $24 million of impairment charges, including charges related to the planned exit from the composite graphite business, and a $322 million foreign-currency translation loss before tax effects in other comprehensive income. The company also entered an agreement to sell its E-Gas technology business.
Important facts for investors to verify
- Whether refining and marketing margins and refinery utilization remain supportive, and how the RIN market affects compliance costs and margins.
- The sustainability and timing of affiliate distributions, which materially supported operating cash flow in Q1.
- Progress on the planned $1.0 billion term-loan repayment, capital spending, dividends, and share repurchases.
- Developments in the MSLP–PDVSA arbitration, environmental remediation estimates, and other guarantees and contingencies.
- Comparability of Q1 2012 results with standalone Phillips 66, given pre-separation accounting allocations and the change in segment reporting.