Phillips 66 — Q3 2017 Form 10-Q
Business context and period. Phillips 66 is an energy manufacturing and logistics company with Midstream, Chemicals, Refining, and Marketing and Specialties businesses. This unaudited report covers the quarter and nine months ended September 30, 2017; comparisons are with 2016. Management cautions that interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Sales and operating revenues | $25.627B | $21.624B | $72.608B | $60.882B |
| Net income attributable to Phillips 66 | $823M | $511M | $1.908B | $1.392B |
| Diluted EPS | $1.60 | $0.96 | $3.66 | $2.61 |
| Cash from operating activities | $401M | Not clearly stated for Q3 | $1.717B | $2.296B |
| Capital expenditures and investments | $367M | Not clearly stated for Q3 | $1.295B | $2.031B |
Margins and segments. Worldwide realized refining margin was $10.49 per barrel in Q3 versus $7.23 a year earlier; refining earnings rose to $550M from $177M. Midstream earned $85M versus $75M, and Chemicals earned $121M versus $101M. Marketing and Specialties earnings declined to $208M from $267M, chiefly on lower marketing margins. Consolidated net income also benefited from higher equity-affiliate earnings. These segment results are attributable earnings, not consolidated operating margins.
Cash, debt, and liquidity. At September 30, cash was $1.547B, total debt $10.201B (including $706M short-term and $9.495B long-term), and total equity $23.959B. Debt-to-capital was 30%; floating-rate debt was 17% of total debt, up from 3% at year-end 2016. The company reported approximately $5.4B of committed credit capacity available. Nine-month operating cash flow fell year over year, reflecting inventory builds at higher commodity prices and increased employee-benefit contributions, partly offset by higher affiliate distributions. Cash declined $1.164B during the period. Common dividends paid were $1.042B and share repurchases were $1.127B.
Changes, outlook, and risks
- Q3 earnings increased 61% year over year, primarily from stronger refining margins, improved Midstream affiliate earnings, and lower refining turnaround costs. Hurricane-related costs, weaker marketing margins, and higher interest expense partly offset gains.
- Nine-month earnings included a $423M noncash pre-tax gain (about $261M after tax) when Phillips 66 consolidated Merey Sweeny, L.P. after a long-running ownership dispute was resolved. This item materially boosted reported results.
- Hurricanes Harvey and Irma disrupted Gulf Coast operations and markets. CPChem’s Cedar Bayou facility shut down after flooding; management expected staged restarts beginning in November and completion in December 2017. Flooding also pushed expected commissioning of CPChem’s Gulf Coast ethane cracker to Q1 2018.
- Management forecast approximately $2B of 2017 capital spending and gave a preliminary 2018 range of $2B–$3B, subject to board approval. No earnings or production guidance was provided in the filing text.
- In October, after quarter-end, Phillips 66 contributed its DAPL and ETCO interests and MSLP to Phillips 66 Partners for stated consideration of $1.65B, including $960M cash received. Phillips 66 Partners also issued debt and equity to fund the transaction. The board authorized an additional $3B of repurchases, bringing total authorization to $12B; repurchases are discretionary.
- Environmental remediation accruals were $458M. The filing cites commodity and margin volatility, weather and operational disruptions, environmental and climate regulation, litigation, and affiliate distribution decisions as risks. Management said known contingencies were not expected to have a material adverse effect based on information then available. It reported no material risk-factor changes and no new reportable legal matters in Q3.
Important facts for investors to verify
- How much of earnings growth reflects durable refining and affiliate performance versus the one-time MSLP gain and unusually strong hurricane-affected refining markets.
- Whether Harvey-related operating disruptions, restart timing, and the cracker project delay affected subsequent results or capital requirements.
- Cash-flow resilience given lower nine-month operating cash flow, inventory investment, benefit-plan contributions, dividends, and ongoing repurchases.
- Post-quarter asset contributions, Phillips 66 Partners’ financing and ownership changes, and the effect on future affiliate earnings and distributions.
- Potential changes in environmental remediation costs, lease and joint-venture guarantees, and floating-rate interest exposure.