Business context and reporting period
Phillips 66 filed this unaudited Form 10-Q for the quarter ended June 30, 2019. The company operates in Midstream, Chemicals, Refining, and Marketing and Specialties (M&S), and includes its 50% equity investments in DCP Midstream and Chevron Phillips Chemical (CPChem).
Financial performance and position
| Metric | Q2 2019 | Q2 2018 |
|---|---|---|
| Sales and operating revenues | $27.847 billion | $28.980 billion |
| Income before income taxes | $1.829 billion | $1.835 billion |
| Net income attributable to Phillips 66 | $1.424 billion | $1.339 billion |
| Diluted EPS | $3.12 | $2.84 |
For the six months ended June 30, sales were $50.950 billion versus $52.575 billion; net income attributable to Phillips 66 was $1.628 billion versus $1.863 billion, and diluted EPS was $3.55 versus $3.87.
Q2 segment pre-tax income: Midstream $423 million (up from $238 million); Chemicals $275 million (down from $324 million); Refining $983 million (down from $1.190 billion); and M&S $353 million (up from $310 million). Worldwide realized refining margin was $11.37 per barrel, down from $12.28. These are management’s non-GAAP realized-margin measures.
Operating cash flow was $1.452 billion for the first half, compared with $2.852 billion in 2018; management reported Q2 operating cash flow of $1.9 billion. First-half capital expenditures and investments were $1.728 billion. Cash declined to $1.819 billion from $3.019 billion at year-end. At June 30, total debt was $11.439 billion, total debt to capital was 30%, and approximately $5.7 billion of committed revolving-credit capacity was available. Total equity was $27.306 billion.
Material changes versus the prior comparable period
- Q2 earnings rose 6%, chiefly from stronger Midstream margins and volumes, improved marketing margins and lower income tax expense; weaker Refining results and lower CPChem equity earnings partly offset the increase.
- First-half earnings fell 13%, mainly because of lower refining margins and CPChem earnings. First-half operating cash flow also fell, reflecting weaker realized refining margins and more unfavorable working-capital effects.
- Refining pre-tax income fell $207 million in Q2; worldwide realized refining margins declined, and refinery utilization was 97% versus 100%. M&S and Midstream income improved.
- The effective tax rate was 18% for Q2 and the first half, versus 23% and 22%, respectively, in 2018. The 2019 rate included a $45 million benefit related to IRS guidance on the deemed repatriation tax.
- Share repurchases were $799 million in the first half versus $3.743 billion in the prior-year period; common dividends paid were $770 million versus $699 million.
Outlook, management commentary, risks and unusual items
The filing provides no specific consolidated earnings or revenue guidance. Management said cash and operating cash generation, together with access to external funding, were expected to meet near- and long-term needs. Results remain sensitive to volatile refining, marketing, NGL and chemicals margins and prices, refinery uptime, feedstock supply, and equity-affiliate distributions. Management noted weaker polyethylene margins and lower NGL prices during the quarter.
- After quarter-end, Phillips 66 agreed to exchange its incentive distribution rights and general partner economic interest in Phillips 66 Partners for 101 million newly issued common units. Closing was scheduled for August 1, 2019; the company expected to own approximately 75% of Partners’ common units afterward.
- The company declared a $0.90-per-share quarterly dividend in July, payable September 3, 2019.
- Potential exposures include a maximum approximately $631 million share of contingent equity contributions tied to Dakota Access/ETCO permits, a $233 million proportionate exposure under the Gray Oak loan guarantee at June 30, and lease residual-value guarantees of $554 million for the Houston headquarters and $305 million for railcars and aircraft. These are contingent maximum exposures, not reported current payments due.
- Environmental accruals were $463 million; the company reported 27 U.S. sites with potential liability under CERCLA or similar laws. Management said it did not expect known contingencies to exceed accruals by an amount materially adverse to the consolidated financial statements, while noting estimates can change.
- Phillips 66 adopted the new lease standard, recording $1.415 billion of operating-lease right-of-use assets and liabilities at adoption. It also recorded opening retained-earnings adjustments, including an $89 million tax-effect reclassification and a $9 million credit-loss adoption adjustment.
- The carrying value of the DCP Midstream investment was $2.3 billion; estimated fair value was approximately 10% below book value. Management considered the decline temporary but noted a potential impairment if conditions do not improve sustainably.
Important facts for investors to verify
- Whether refining margins, refinery utilization and cash generation recover, and how working capital affects reported operating cash flow.
- Whether the lower estimated fair value of DCP Midstream leads to an impairment.
- Closing and accounting effects of the Phillips 66 Partners IDR and general-partner-interest exchange.
- Conditions and potential funding requirements associated with Dakota Access, Gray Oak and other guarantees.
- How commodity prices, chemicals margins, environmental regulation and equity-affiliate distributions affect future results; the filing notes these are subject to substantial uncertainty.