Phillips 66 — 2020 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results; dollar amounts below are in millions unless stated otherwise. Phillips 66 operates midstream, chemicals, refining, and marketing and specialties businesses.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales and operating revenues | $10,913 | $27,847 | $31,791 | $50,950 |
| Income (loss) before tax | $(445) | $1,829 | $(2,923) | $2,169 |
| Net income (loss) attributable to Phillips 66 | $(141) | $1,424 | $(2,637) | $1,628 |
| Diluted EPS | $(0.33) | $3.12 | $(6.00) | $3.55 |
| Cash from operating activities | $764 | Not clearly stated for Q2 | $981 | $1,452 |
- Margins and operations: Worldwide realized refining margin was $2.60 per barrel in Q2, versus $11.37 a year earlier. Refinery utilization fell to 75% from 97%. Refining reported a Q2 pretax loss of $878; Midstream earned $324, Chemicals $42, and Marketing and Specialties $286.
- Cash and liquidity: Cash was $1,890 at June 30, up from $1,614 at year-end 2019. First-half capital expenditures and investments were $1,862. The company reported approximately $6.5 billion of committed capacity available at quarter-end, including revolving facilities and the new term loan facility.
- Debt and equity: Total debt was $14,446, up from $11,763 at year-end; debt-to-capital rose to 38% from 30%. Total equity was $23,295, down from $27,169. First-half common dividends were $789; the quarterly dividend remained $0.90 per share.
Material changes versus comparable periods
- Q2 revenue fell 61% year over year; first-half revenue fell 38%, mainly because of lower commodity prices and sales volumes.
- Phillips 66 moved from Q2 2019 attributable net income of $1,424 to a Q2 2020 attributable loss of $141. Management attributed the deterioration chiefly to lower refining margins and production and weaker affiliate earnings.
- First-half results included $3,006 of impairments: $1,845 for Refining goodwill and $1,161 for the DCP Midstream investment. The Refining goodwill balance was reduced to zero.
- Operating cash flow for the first half declined to $981 from $1,452. Management cited lower refining margins and production and lower affiliate distributions, partly offset by favorable working-capital effects and stronger marketing margins.
- First-half capital spending was reduced from the prior year’s level only on an adjusted basis as joint-venture funding changed; management also announced a $700 reduction to 2020 consolidated capital spending plans.
Outlook, management commentary, risks and unusual items
- Management said the depth and duration of COVID-19’s economic effects were unknown and near-term product demand, prices, margins, and volumes remained highly uncertain. It expected refining, marketing, and chemical margins and transportation volumes to remain challenged if disruption persisted. No specific earnings or production guidance was provided.
- Liquidity measures included issuing $2 billion of senior notes, drawing $1 billion under a $2 billion 364-day term loan facility, temporarily suspending share repurchases, reducing 2020 consolidated capital spending plans by $700, and targeting $500 of operating and administrative cost reductions in 2020.
- The company could not reliably estimate its annual effective tax rate because of COVID-19 uncertainty, so it calculated the first-half rate using actual results. The Q2 effective rate was 85%; the first-half rate was 15%. The CARES Act carryback provision partly offset the tax impact of the nondeductible goodwill impairment.
- Dakota Access litigation: After quarter-end, a court ordered the pipeline shut down and emptied by August 5, 2020, pending an environmental impact statement. An appeals court temporarily stayed the shutdown order on July 14; the appeal remained unresolved. Phillips 66 Partners’ maximum potential contribution under the related undertaking was approximately $631, and it could also be asked to support ongoing costs if the pipeline ceased operations.
- Other material exposures include a $583 proportionate guarantee exposure related to Gray Oak Pipeline debt, a $554 headquarters lease residual-value guarantee, $429 of environmental accruals, and other guarantees and commitments. Management said known contingent exposures were not expected to materially adversely affect the consolidated financial statements, while noting estimates could change.
- Development of the Liberty and Red Oak pipeline systems was deferred amid the challenging business environment. DCP Midstream announced capital and cost reductions, including a 75% growth-capital reduction.
Important facts for investors to verify
- Whether refining demand, utilization, and margins recovered after the quarter, and whether the announced 2020 cost and capital-spending reductions were achieved.
- Current liquidity, debt maturities and borrowing terms, and the sustainability of the $0.90 quarterly dividend amid weaker cash generation.
- The outcome and operational status of the Dakota Access appeal, including any resulting contribution or expense obligations.
- Whether impairment assumptions and affiliate performance—especially DCP Midstream and CPChem—changed after June 30.
- Potential future COVID-19 effects on customers’ ability to pay, inventory valuations, affiliate distributions, environmental liabilities, and other contingencies.