Phillips 66 — Q2 2022 Form 10-Q Summary
Business context and reporting period
Phillips 66 is a diversified energy company with Midstream, Chemicals, Refining, and Marketing and Specialties businesses. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. The company completed its merger with Phillips 66 Partners on March 9, 2022, making it a wholly owned subsidiary. The merger and higher commodity prices affect period-to-period comparisons.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales and operating revenues | $48.577 billion | $27.002 billion | $84.756 billion | $48.629 billion |
| Net income attributable to Phillips 66 | $3.167 billion | $296 million | $3.749 billion | Loss of $358 million |
| Diluted earnings per share | $6.53 | $0.66 | $8.00 | Loss of $0.83 |
| Cash from operating activities | $1.8 billion | Not stated here | $2.919 billion | $2.014 billion |
| Capital expenditures and investments | $376 million | Not stated here | $746 million | $711 million |
Q2 pretax income by segment was Refining $3.036 billion, Marketing and Specialties $765 million, Midstream $292 million, and Chemicals $273 million; Corporate and Other recorded a $260 million pretax loss. Worldwide realized refining margin was $28.31 per barrel, compared with $3.92 a year earlier. Worldwide refining utilization was 90%, versus 88%.
At June 30, 2022, cash and equivalents were $2.809 billion, total debt was $12.969 billion, and total equity was $24.573 billion. Debt-to-capital was 35%, compared with 40% at year-end 2021. The company had $5.0 billion of available capacity under its new $5 billion revolving facility, with no borrowings outstanding. Current assets were $22.492 billion and current liabilities were $17.608 billion.
Material changes versus the prior comparable period
- Revenue rose sharply, largely reflecting higher prices for refined products, crude oil, and NGL. Q2 net income attributable to Phillips 66 increased to $3.167 billion from $296 million.
- Refining results improved substantially as market crack spreads widened amid recovering demand and supply disruptions related to Russia’s invasion of Ukraine. Q2 Refining pretax income shifted from a $729 million loss to $3.036 billion of income.
- Marketing and Specialties benefited from higher realized fuel margins. Midstream benefited from stronger DCP Midstream and NGL results, but the segment’s overall Q2 result was lower year over year because of a $240 million decline in the fair value of the NOVONIX investment.
- Chemicals pretax income declined to $273 million from $623 million, mainly because of higher feedstock, utility, and maintenance costs and unusually strong prior-year margins.
- Six-month operating cash flow increased to $2.919 billion from $2.014 billion, while working capital absorbed cash. Cash declined $338 million from year-end to $2.809 billion.
- Total debt fell by about $1.5 billion from year-end. The company repaid $1.0 billion of notes and a $450 million term loan at maturity. It also exchanged approximately $3.2 billion of Phillips 66 Partners notes for notes issued by Phillips 66 Company.
Outlook, management commentary, risks, and unusual items
- Management reported continued uncertainty from the lingering pandemic, the Russia-Ukraine conflict, and inflationary pressures, and said it would remain disciplined in capital allocation. The filing provides no specific earnings or revenue guidance.
- The company is implementing a multi-year business transformation and targets sustainable annualized cost reductions of at least $700 million by the end of 2023. It recorded $25 million of restructuring costs in Q2 2022.
- The board declared a $0.97-per-share quarterly dividend payable September 1, 2022. Share repurchases resumed in Q2; 700,145 shares were repurchased during the quarter for approximately $66 million.
- CEO Mark Lashier succeeded Greg Garland effective July 1, 2022; Garland remained Executive Chairman with an expected retirement from that role in 2024.
- Material exposures include volatility in crude, refined-product, NGL, and chemicals prices and margins; refinery operating and turnaround risks; environmental regulation and remediation; and legal and regulatory developments affecting energy markets and emissions.
- The Dakota Access pipeline easement litigation remains unresolved and the required environmental impact statement may be delayed. Phillips 66’s share of maximum potential equity contributions under the contingent undertaking was approximately $467 million. The company could also face support costs if the pipeline had to stop operating.
- Environmental accruals were $430 million at June 30, 2022. The company also disclosed $2.374 billion of performance obligations secured by letters of credit and bank guarantees, plus lease residual-value guarantees with stated maximum exposures of $514 million for its headquarters and $221 million for railcar and airplane leases.
- Management stated that known contingent liabilities are not currently expected to have a material adverse impact beyond recorded accruals. It also cautioned that environmental, legal, and tax estimates may change. The filing announced a target to reduce operational Scope 1 and Scope 2 emissions intensity 50% from 2019 levels by 2050.
Important facts for investors to verify
- How sustainable the unusually strong Q2 refining and marketing margins are, given the filing’s emphasis on commodity and market volatility.
- Whether the $700 million annualized cost-reduction target is achieved by the end of 2023, and the costs and timing required to implement it.
- Developments in the Dakota Access environmental impact statement and litigation, including potential contributions or operating-support obligations.
- Cash conversion and working-capital movements, and the effect of future affiliate distributions, which Phillips 66 does not control.
- The performance and valuation of NOVONIX and CPChem, which offset some of the quarter’s refining-led gains.
- How merger-related share issuance, debt exchanges, debt repayment, dividends, and resumed repurchases affect leverage and per-share results.
- Environmental, emissions, and renewable-fuel compliance costs, including the filing’s reported RIN expenses and longer-term emissions target.