Phillips 66 — Q2 2021 Form 10-Q Summary
Business context and reporting 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 six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Management cautions that interim results are not necessarily indicative of full-year results.
Financial results and position
| Metric | Q2 2021 | Q2 2020 |
|---|---|---|
| Sales and other operating revenues | $27.0 billion | $10.9 billion |
| Income (loss) before income taxes | $436 million | $(445) million |
| Net income (loss) attributable to Phillips 66 | $296 million | $(141) million |
| Diluted earnings (loss) per share | $0.66 | $(0.33) |
| Cash from operating activities | $1.7 billion | Not separately stated for the quarter in the supplied filing text |
- For the first six months, revenue was $48.6 billion; Phillips 66 reported a net loss attributable to the company of $358 million, versus a $2.637 billion loss in 2020. The improvement chiefly reflects lower impairment charges: $198 million in 2021 versus $3.006 billion in 2020.
- Six-month operating cash flow was $2.014 billion, including a $1.1 billion federal tax refund. Capital expenditures and investments were $711 million; common dividends paid were $788 million. Cash declined $307 million from year-end to $2.207 billion.
- At June 30, total debt was $15.413 billion, including $2.489 billion short-term debt; debt-to-capital was 43%, versus 42% at year-end. Total equity was $20.602 billion. The company reported approximately $5.7 billion of committed revolving credit capacity available and no borrowings under its $5 billion revolver.
- Q2 segment income (loss) before tax: Midstream $312 million; Chemicals $623 million; Refining loss $(729) million; Marketing and Specialties $476 million; Corporate and Other loss $(246) million.
- Worldwide realized refining margin was $3.92 per barrel in Q2, versus $2.60 a year earlier; refinery utilization was 88%, versus 75%. These are company-presented non-GAAP operating measures.
Material changes and management commentary
Management said demand for refined products began recovering in 2021 as vaccination expanded and pandemic restrictions eased. Refining margins and throughput improved year over year, but refining profitability remained challenged. Higher Chemicals earnings reflected strong demand and tight supply, including disruption from February winter storms. Q2 improvement also reflected higher affiliate earnings, marketing fuel margins and sales volumes.
Results remained uneven: Refining posted a Q2 pretax loss, and first-half refining losses increased excluding the large 2020 impairment, as higher RIN costs, weaker product differentials and winter-storm-related utility costs weighed on performance. Six-month RIN expenses for wholly owned refineries were $422 million, compared with $147 million in 2020; the company’s share of joint-venture refinery RIN costs was $178 million, compared with $50 million.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided in the supplied filing text. Management stated the duration and economic effects of COVID-19 remain uncertain; further impairments or portfolio rationalization may occur if disruption persists.
- Environmental accruals were $455 million at June 30, up from $427 million at year-end. The company said it expects a substantial portion of these expenditures within 30 years and does not currently expect compliance with existing environmental requirements to materially adversely affect results or financial position.
- Dakota Access litigation was dismissed in June 2021, and an injunction to stop operations while the environmental review proceeds was denied. The EIS is expected in 2022, but litigation could resume or new challenges could be filed. Phillips 66 Partners’ maximum potential contribution under the related undertaking was approximately $631 million; additional support could be required if the pipeline ceased operating and affiliates lacked funds.
- Other disclosed exposures include a $514 million maximum headquarters lease residual-value guarantee, $209 million of railcar and aircraft lease residual guarantees, and $883 million of purchase and other commitments supported by letters of credit and bank guarantees. These are maximum or secured amounts, not stated expected losses.
- Key business risks include commodity prices and margins, pandemic-driven demand, weather and operating disruptions, RIN and environmental regulation costs, litigation and remediation, and decisions by equity affiliates. Management reported no material change to previously disclosed risk factors and no reportable litigation in the quarter.
Important facts for investors to verify
- How much of reported operating cash flow and liquidity depends on the one-time $1.1 billion federal tax refund, and how cash generation trends without it.
- Whether refining margins, utilization and profitability recover, particularly given RIN costs, turnaround expenses and winter-storm impacts.
- Progress and any further obligations related to the Dakota Access EIS, litigation and contingent equity undertaking.
- Whether environmental accruals, guarantees and other contingent exposures change materially as legal, regulatory and remediation matters develop.
- The status of the suspended share-repurchase program; the company reported $2.514 billion remaining under its authorization and no repurchases in the first half of 2021.