Phillips 66 — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Phillips 66 is a diversified energy company with Midstream, Chemicals, Refining, and Marketing and Specialties operations. Financial statements are unaudited; management cautions that interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Sales and other operating revenues | $35.1B | $48.6B | $69.5B | $84.8B |
| Net income attributable to Phillips 66 | $1.697B | $3.167B | $3.658B | $3.749B |
| Diluted EPS | $3.72 | $6.53 | $7.92 | $8.00 |
| Income before income taxes | $2.244B | $4.106B | $4.895B | $4.934B |
Q2 revenue fell 28%, mainly reflecting lower prices for refined products, crude oil, and NGL. Q2 earnings attributable to Phillips 66 declined about 46%, primarily because of lower realized refining margins. For the first half, earnings were slightly lower year over year.
- Refining: Q2 pretax income was $1.134B, down from $3.096B. Worldwide realized refining margin was $15.32 per barrel versus $28.62; crude capacity utilization was 93% versus 90%. Management cited lower market crack spreads, partly offset by improved feedstock advantage and higher volumes.
- Midstream: Q2 pretax income rose to $604M from $258M, aided by consolidation and increased DCP LP ownership. Chemicals pretax income decreased to $192M from $273M; Marketing and Specialties pretax income decreased to $644M from $739M.
- Cash flow: First-half operating cash flow was $2.154B, down from $2.919B. Investing used $697M and financing used $4.610B. Management reported Q2 operating cash flow of approximately $1B.
- Liquidity and debt: Cash was $3.029B at June 30, down from $6.133B at year-end. Total debt was $19.866B versus $17.190B; debt-to-capital was 39% versus 34%. Approximately $5.6B of committed capacity was available, and the $5B revolving facility was undrawn.
- Capital returns: First-half common dividends were $960M ($2.10 per share); share repurchases were $2.109B. The company also spent about $3.8B to acquire publicly held DCP LP common units.
Material changes and significant items
- On June 15, Phillips 66 completed the DCP LP merger, paying $41.75 per public common unit and increasing its economic interest in DCP LP from 43.3% to 86.8%. The transaction eliminated the public common-unit noncontrolling interest from the closing date forward.
- Total debt increased, including $1.25B of senior notes issued in March and $1.25B drawn under a delayed-draw term loan. DCP LP also used facility borrowings to repay or redeem debt; early redemption resulted in a $53M pretax loss.
- Q2 restructuring costs were $41M for the business transformation and $22M for DCP integration; first-half costs were $76M and $34M, respectively.
- First-half common shares repurchased totaled 21.5 million for approximately $2.1B. The average Q2 repurchase price was $97.98 per share, including excise tax.
Outlook, risks, and contingencies
- Management expected to achieve by year-end 2023 its transformation targets: at least $800M of sustainable annual run-rate cost reductions and at least $200M of annual sustaining-capital reductions.
- The Rodeo Renewed renewable-fuels project was expected to cost approximately $1.25B; projected 2023 spending was about $200M above budget. On August 1, 2023, the company acquired West Coast marketing operations for approximately $260M plus working-capital adjustment, and sold its South Texas Gateway Terminal interest for approximately $275M.
- Management identified volatile refining, marketing, NGL, natural gas, and chemicals margins and prices as key drivers of earnings and cash flow. Other stated risks include operating disruptions, project execution, regulation and climate policy, and the credit and distribution decisions of equity affiliates.
- Dakota Access litigation remains a potential exposure. Phillips 66’s 25% share of maximum contingent equity contributions was approximately $467M; a pipeline shutdown could also require support for ongoing costs, including about $20M of annual interest. A draft environmental impact statement was expected in Q3 2023.
- Environmental accruals were $449M at June 30. Management said known contingent exposures were not expected to exceed accruals by an amount that would materially adversely affect the consolidated financial statements, while noting estimates may change.
- Environmental regulation and renewable-fuel compliance remain relevant costs: first-half RIN expenses were $293M for wholly owned refineries, plus $217M as Phillips 66’s share for jointly owned refineries.
Important facts for investors to verify
- Whether refining margins and earnings stabilize after the sharp year-over-year Q2 decline, and how refinery throughput and crack spreads develop.
- Whether anticipated DCP integration synergies and the transformation savings targets are achieved, and the impact of added debt and interest costs.
- Cash generation, capital spending, buybacks, dividends, and liquidity after the DCP LP acquisition and other capital commitments.
- Progress and costs for Rodeo Renewed, including whether the project remains on schedule and within its revised spending expectations.
- Developments in the Dakota Access environmental review and litigation, and any resulting financial or operating obligations.
- Potential changes in environmental, climate, and renewable-fuel compliance costs, along with exposures from legal matters and guarantees.