Phillips 66 — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited results; amounts in U.S. dollars unless stated otherwise.
Business context and results
Phillips 66 operates in Midstream, Chemicals, Refining, and Marketing and Specialties. Third-quarter earnings improved substantially, led by stronger refining results and higher earnings from equity affiliates. Comparisons of reported revenue and taxes are affected by a 2018 accounting change that presents petroleum excise taxes net rather than gross.
Key financial metrics
- Q3 revenue and income: Sales and other operating revenues were $29.788 billion; net income was $1.568 billion, including $1.492 billion attributable to Phillips 66. Diluted EPS was $3.18, versus $1.60 in Q3 2017.
- Nine-month income: Net income was $3.557 billion, with $3.355 billion attributable to Phillips 66; diluted EPS was $7.03, versus $3.66 in 2017.
- Cash flow: Operating cash flow was $582 million in Q3 and $3.434 billion for the first nine months, compared with $1.717 billion in the prior-year nine-month period. Nine-month capital expenditures and investments were $1.645 billion.
- Liquidity: Cash was $924 million at September 30, down from $3.119 billion at year-end 2017. The company reported approximately $5.8 billion of committed capacity available under credit facilities.
- Debt and equity: Total debt was $11.337 billion, up from $10.110 billion at year-end; debt-to-capital was 31%, versus 27%. Total equity was $25.795 billion.
- Shareholder returns: Nine-month common dividends were $1.069 billion; dividends paid per share were $2.30. The company repurchased $4.148 billion of stock, including a separately authorized $3.280 billion repurchase of 35 million shares from Berkshire Hathaway and National Indemnity.
- Segment earnings, Q3: Refining $936 million; Midstream $240 million; Chemicals $210 million; Marketing and Specialties $318 million; Corporate and Other loss $136 million.
- Refining margins: Worldwide realized refining margin was $13.36 per barrel in Q3, up from $10.49; nine-month margin was $11.72, up from $9.19. These are company-defined non-GAAP measures.
Changes versus prior periods
- Q3 net income rose 81% year over year; nine-month net income rose 76%. Management cited higher realized refining and marketing margins, stronger Midstream and Chemicals affiliate earnings, and lower U.S. federal corporate tax rates.
- Refining segment income increased to $936 million from $550 million in Q3. Worldwide utilization declined to 93% from 98%, primarily due to higher unplanned downtime.
- Midstream and Chemicals results benefited from higher volumes and affiliate earnings; Chemicals also benefited from full operation of new Gulf Coast assets.
- Operating cash flow increased year over year, but working capital absorbed cash, including a $2.178 billion increase in inventories for the first nine months.
- Reported 2017 sales and taxes include gross excise-tax presentation, unlike 2018. Revenue growth rates therefore are not directly comparable without adjusting for the presentation change.
Outlook, risks and unusual items
- No specific earnings or production guidance is provided. Management said cash, operating cash generation and external funding access should be sufficient for expected capital spending, dividends, benefit contributions, debt repayments and share repurchases.
- Key sensitivities include volatile crude, refined-product, NGL, natural-gas and petrochemical prices and margins; refinery uptime and maintenance; affiliate distributions; project execution; regulation; weather; and environmental, legal and tax matters.
- Management expects the Gray Oak Pipeline, planned for up to 900,000 barrels per day, to enter service by year-end 2019; total project cost is estimated at approximately $2.2 billion. Sweeny Hub expansion is expected to be completed in late 2020.
- Environmental accruals were $456 million at quarter-end. The filing says known contingency costs are not expected to exceed accruals by a material amount, while noting estimates may change. Potential maximum exposure under specified guarantees included $554 million for the Houston headquarters lease and $319 million for railcar and airplane leases.
- The 2017 comparison includes a $423 million pretax gain from consolidating Merey Sweeny; its absence weighs on nine-month year-over-year comparisons. The Tax Act reduced the federal corporate rate to 21%; related tax accounting remained provisional.
- Phillips 66 planned to adopt the new lease standard on January 1, 2019 and expected a material increase in reported assets and liabilities, with no material income-statement or cash-flow effect.
Important facts for investors to verify
- How much of improved earnings and cash generation is sustainable across changing refining margins, commodity prices and affiliate distributions.
- Whether working-capital needs, particularly inventory investment, continue to constrain cash and liquidity.
- Execution, cost and ownership outcomes for Gray Oak and other major Midstream projects, and the expected returns on that spending.
- The effect of ongoing share repurchases and debt issuance on leverage, liquidity and per-share results.
- Final Tax Act accounting, lease-standard balance-sheet effects, and any changes in environmental, legal or guarantee exposures.