Phillips 66 — 2020 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Phillips 66 is an energy manufacturing and logistics company with Midstream, Chemicals, Refining, and Marketing and Specialties businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales and operating revenues | $15,929 | $27,218 | $47,720 | $78,168 |
| Income (loss) before tax | $(1,350) | $943 | $(4,273) | $3,112 |
| Net income (loss) attributable to Phillips 66 | $(799) | $712 | $(3,436) | $2,340 |
| Diluted EPS | $(1.82) | $1.58 | $(7.83) | $5.13 |
| Cash from operating activities | $491 | Not stated here | $1,472 | $3,114 |
Revenue declined 41% in Q3 and 39% for the nine-month period, primarily reflecting lower petroleum and crude-oil prices and volumes. Q3 refining margins were sharply weaker: worldwide realized refining margin was $1.78 per barrel versus $11.18 a year earlier. Worldwide refinery utilization was 77% versus 97% in Q3 2019.
Segments and material changes
- Refining: Q3 pretax loss of $1.903 billion, compared with $856 million of pretax income a year earlier; nine-month pretax loss was $5.042 billion. Lower demand, margins and refinery runs drove deterioration, alongside impairments. Hurricane impacts also reduced Gulf Coast production.
- Midstream: Q3 pretax income was $146 million, compared with a $460 million loss in Q3 2019, largely because the prior-year quarter included an $853 million DCP Midstream impairment. Nine-month results were a $232 million loss versus $279 million income, reflecting impairment charges and other weaker results.
- Chemicals: Q3 pretax income was $231 million, broadly level with $227 million in 2019; nine-month income fell to $442 million from $729 million, principally from lower margins and affiliate earnings.
- Marketing and Specialties: Q3 pretax income declined to $415 million from $498 million as product volumes weakened. Nine-month income increased to $1.214 billion from $1.056 billion, supported by higher realized marketing fuel margins.
Total impairments were $1.140 billion in Q3 and $4.146 billion in the first nine months, compared with $853 million in Q3 2019 and $856 million for the 2019 nine-month period. Significant 2020 items included a $1.845 billion Refining goodwill impairment in Q1, a $1.030 billion San Francisco Refinery asset-group impairment in Q3, a $1.2 billion DCP Midstream investment impairment in Q1, and an $84 million Red Oak Pipeline impairment in Q3.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $1.462 billion, down from $1.614 billion at year-end 2019. Nine-month operating cash flow fell to $1.472 billion from $3.114 billion.
- Nine-month capital expenditures and investments were $2.414 billion; common dividends paid were $1.182 billion. The company suspended share repurchases in March and spent $443 million on repurchases before suspension.
- Total debt was $14.526 billion, up from $11.763 billion at December 31, 2019; debt to total capital rose to 39% from 30%. Debt included $1.860 billion short-term and $12.666 billion long-term.
- Phillips 66 issued $2 billion of senior notes and borrowed $1 billion under a 364-day term loan during 2020. The term-loan facility’s unused additional capacity expired in September. At quarter-end, the company reported approximately $5.5 billion of committed revolving credit capacity available; its $5 billion revolving facility and commercial paper program were undrawn. Phillips 66 Partners had $290 million outstanding under its $750 million revolver.
- Management stated that cash, operating cash flow and external funding access were expected to cover near- and long-term funding needs, including capital spending, dividends, benefit-plan contributions and debt repayments.
Outlook, risks and notable developments
- Management cited COVID-19-related demand weakness, depressed refining margins and reduced refinery utilization as continuing near-term pressures; the duration and economic consequences of the pandemic were uncertain. Further impairments could be required if projected cash flows deteriorate.
- Management reduced 2020 consolidated capital spending plans by $700 million and targeted $500 million in 2020 operating and administrative cost reductions. Subject to board approval, expected 2021 capital spending was $2 billion or less; detailed plans were expected in December 2020.
- The company announced “Rodeo Renewed,” a plan to reconfigure the Rodeo, California facility to produce renewable fuels, with expected start-up in early 2024 and planned capacity above 50,000 barrels per day. Santa Maria, certain Rodeo assets and associated Midstream assets were planned to cease operations in 2023.
- The Dakota Access Pipeline faced litigation over its Lake Oahe easement and an environmental impact statement. A trial-court shutdown order was stayed pending appeal; further court decisions were expected in late 2020 or early 2021. Phillips 66 Partners’ maximum potential contribution under a contingent equity undertaking was approximately $631 million, in addition to possible support for ongoing expenses if the pipeline were shut down.
- Environmental accruals were $428 million at September 30. The company reported that it did not currently expect known contingencies to exceed accruals by an amount that would materially adversely affect consolidated results, but estimates may change.
- The quarterly dividend remained $0.90 per share; a dividend at that rate was declared in October for payment in December. The 2020 nine-month effective tax rate was 25%; the company said pandemic uncertainty prevented a reliable annual-rate estimate and it used actual results for the period.
Most important facts for investors to verify
- Whether refined-product demand, crack spreads, refinery utilization and operating cash flow recover, and whether further asset or investment impairments occur.
- Debt maturities, refinancing needs, leverage and available liquidity after pandemic-related borrowing and the expiration of unused term-loan capacity.
- Progress, costs, timing and expected economics of the Rodeo renewable-fuels conversion and related 2023 asset closures.
- Final court outcomes and potential financial exposure related to the Dakota Access Pipeline, including the contingent contribution undertaking.
- Whether the 2021 capital-spending ceiling and cost-reduction plans are achieved while maintaining the dividend and funding planned projects.