Phillips 66 — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Phillips 66 operates in midstream, chemicals, refining, and marketing and specialties. Comparisons below are against the corresponding 2020 periods unless noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales and operating revenues | $30.243bn | $15.929bn | $78.872bn | $47.720bn |
| Income (loss) attributable to Phillips 66 | $402m | ($799m) | $44m | ($3.436bn) |
| Diluted EPS | $0.91 | ($1.82) | $0.08 | ($7.83) |
| Cash from operating activities | $2.2bn | Not stated here | $4.217bn | $1.472bn |
Q3 improvement primarily reflected better realized refining margins, higher CPChem equity earnings, and a $224m unrealized gain on the NOVONIX investment. These gains were partly offset by lower income tax benefits and increased impairments. For the nine-month comparison, lower impairments also materially contributed to the recovery.
- Segment income before tax, Q3: Midstream $629m (versus $146m); Chemicals $631m ($231m); Refining loss $1.126bn (loss of $1.903bn); Marketing and Specialties $545m ($415m). Refining remained loss-making despite improved margins.
- Refining: Worldwide realized refining margin was $8.57/barrel versus $1.78; crude throughput utilization was 86% versus 77%. These are company-defined non-GAAP measures; reported worldwide refining loss before tax was $1.126bn.
- Margins and costs: Management cited recovering product demand, wider market crack spreads, and stronger chemical margins. Higher RIN costs, utilities, turnarounds, maintenance, and repair expenses offset some improvement.
- Cash flow: Nine-month operating cash flow rose to $4.217bn, including a $1.1bn federal tax refund and $2.0bn of distributions from equity affiliates. Working-capital movements also affected cash generation.
- Capital allocation: Nine-month capital expenditures and investments were $1.263bn; common dividends paid were $1.182bn, or $2.70 per share. Net debt repayments were approximately $1.0bn. Q3 dividends paid were $394m.
Financial position and liquidity
- At September 30, cash and cash equivalents were $2.897bn, compared with $2.514bn at year-end 2020. Total debt was $14.910bn, down from $15.893bn; debt-to-capital remained 42%.
- Current assets were $16.019bn and current liabilities $13.921bn. Total equity was $20.597bn, versus $21.523bn at year-end.
- Management reported approximately $5.7bn of committed revolving credit capacity available. Phillips 66 had no borrowings under its $5bn revolver or commercial paper program at quarter-end.
- Phillips 66 repaid $500m under its delayed-draw term loan in September. Management expected to repay approximately $500m of debt in Q4 2021. A further $1bn of debt due within a year was classified as long-term based on intent and ability to refinance.
Material changes, outlook, and risks
- Alliance Refinery impairment: Hurricane Ida damage and reassessment of the refinery’s role led to a $1.298bn pre-tax impairment in Q3, reducing the asset group’s carrying value to approximately $200m. The refinery was expected to remain shut through Q4 2021. The impairment’s discrete tax treatment significantly affected the effective tax rate.
- Other notable items: Phillips 66 acquired a 16% interest in NOVONIX for $150m; its September 30 fair value was $374m. The $224m unrealized gain is included in reported results and is not operating cash flow. The Liberty Pipeline investment impairment was $198m pre-tax in Q1 2021.
- Management outlook: Refined-product demand, refining margins, and throughput had improved during 2021 as restrictions eased and vaccination advanced. The duration and economic effects of COVID-19 remained uncertain; further impairments or portfolio rationalization were possible. No specific consolidated earnings guidance is provided in the supplied filing text.
- Merger announced after quarter-end: On October 26, 2021, Phillips 66 agreed to acquire publicly held Phillips 66 Partners units in an all-stock transaction, at 0.50 PSX shares per common unit. The transaction was expected to close in Q1 2022; the company estimated issuance of approximately 42m shares, subject to change and closing conditions.
- Other exposures: Dakota Access litigation and its easement remain subject to regulatory and legal developments. Phillips 66 Partners’ maximum potential equity contribution under the related undertaking was approximately $631m; additional support could be required if the pipeline ceased operations. Environmental accruals were $453m. Commodity prices, refining and chemical margins, RIN costs, weather, regulation, and affiliate distributions remain important risks.
- In September, the company announced 2030 emissions-intensity targets versus 2019: 30% reduction for Scope 1 and 2 emissions and 15% for Scope 3 emissions. Management cautioned that regulatory, market, and execution factors could affect results and targets.
Investor verification priorities
- Separate recurring operating performance from the Alliance impairment, NOVONIX unrealized gain, tax refund, and other material items.
- Verify the sustainability of refining-margin recovery, refinery utilization, RIN expenses, and the Alliance Refinery restart or future use.
- Assess cash flow quality, including the one-time $1.1bn tax refund, working-capital movements, and affiliate distributions.
- Review debt maturities, refinancing assumptions, expected Q4 repayment, and liquidity after dividends and capital spending.
- Track Dakota Access litigation, potential contingent funding, environmental obligations, and the conditions and dilution implications of the Phillips 66 Partners merger.