Phillips 66 — 2019 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited results; amounts are in U.S. dollars. Phillips 66 operates in Midstream, Chemicals, Refining, and Marketing and Specialties.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Sales and operating revenues | $27.218 billion | $29.788 billion | $78.168 billion | $82.363 billion |
| Income before income taxes | $943 million | $1.975 billion | $3.112 billion | $4.527 billion |
| Net income attributable to Phillips 66 | $712 million | $1.492 billion | $2.340 billion | $3.355 billion |
| Diluted earnings per share | $1.58 | $3.18 | $5.13 | $7.03 |
| Cash from operating activities | $1.7 billion | Not stated in the provided Q3 discussion | $3.114 billion | $3.434 billion |
- Quarterly earnings fell 52%; management attributed the decline primarily to an $853 million DCP Midstream investment impairment and lower realized refining margins. Lower tax expense, improved NGL margins, and stronger U.S. Marketing and Specialties margins and volumes partly offset the decreases.
- Quarterly equity earnings of affiliates were $499 million, down from $779 million. The effective tax rate was 16%, versus 21% in Q3 2018.
- Worldwide realized refining margin was $11.18 per barrel, versus $13.36; refining pre-tax income declined to $856 million from $1.232 billion. Refinery utilization was 97%, compared with 93%.
- Midstream reported a $460 million pre-tax loss, versus $284 million of income, largely reflecting the DCP Midstream impairment. Transportation and NGL and Other results improved. Chemicals pre-tax income was $227 million, down from $263 million; Marketing and Specialties was $498 million, up from $423 million.
Financial position, cash flow, and capital allocation
- At September 30, cash and cash equivalents were $2.268 billion, down from $3.019 billion at year-end 2018. Total debt was $11.925 billion, up from $11.160 billion; debt-to-capital was 31%, versus 29%.
- Current assets were $15.617 billion and current liabilities $12.083 billion. Total equity was $27.092 billion.
- For the first nine months, operating cash flow was $3.114 billion; capital expenditures and investments were $2.595 billion; common-stock repurchases were $1.238 billion; and common dividends paid were $1.172 billion. Cash declined by $751 million over the period.
- Management reported approximately $5.7 billion of committed capacity available under revolving credit facilities at quarter-end. Phillips 66 and Phillips 66 Partners had no direct revolving-credit-facility borrowings outstanding.
- Phillips 66 Partners issued $900 million of notes in September, using part of the proceeds to repay $400 million of term loans. It repaid a further $300 million of notes on October 15, 2019, after quarter-end.
Outlook, material developments, and risks
- No earnings or revenue guidance is stated. The company forecast 2019 capital spending of $3.7–$4.0 billion, including $1.2 billion for Phillips 66 Partners; adjusted capital spending, after Gray Oak partner funding, was forecast at $3.3–$3.6 billion.
- Management said it expected cash and operating cash flow, together with access to external funding, to meet near- and long-term requirements. It cautioned that cash flow is sensitive to volatile refining, marketing, NGL, and chemicals margins and prices, and to affiliate distribution decisions.
- Phillips 66 recorded an $853 million impairment of its DCP Midstream investment after concluding the market-value decline was other than temporary. DCP Midstream’s September impairment assessments also reduced Phillips 66’s equity earnings by $47 million.
- Effective August 1, Phillips 66 Partners eliminated incentive distribution rights and exchanged its economic general-partner interest for 101 million common units; Phillips 66 reported a 75% limited-partner interest at quarter-end.
- After quarter-end, the board authorized an additional $3 billion share-repurchase program, bringing cumulative authorization since 2012 to $15 billion, and declared a $0.90-per-share quarterly dividend payable in December.
- Environmental remediation accruals were $447 million. The company also disclosed contingent exposures, including a potential Phillips 66 Partners share of up to $631 million under a Dakota Access contingent equity undertaking, a $382 million Gray Oak loan guarantee exposure at quarter-end, and lease residual-value guarantees. Management said it considered a material adverse impact from known contingencies remote, while noting estimates may change.
- Key business risks include commodity-price and margin volatility, project construction and permitting, operational disruptions, environmental and climate regulation, litigation, and joint-venture financing or distribution decisions. Management reported no material change to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- Review the assumptions and valuation inputs behind the $853 million DCP Midstream impairment and any subsequent changes in its carrying value.
- Track refining margins, refinery utilization and turnaround activity, plus NGL and Chemicals margins, which drove significant year-over-year earnings changes.
- Compare actual 2019 capital spending with the $3.7–$4.0 billion forecast and assess project timing, costs, and partner funding.
- Monitor liquidity, debt maturities, share repurchases, dividends, and cash conversion, including the use of debt or cash to support capital returns.
- Assess the status of the Dakota Access permit dispute, Gray Oak construction and guarantee exposure, and environmental and legal liabilities.