Phillips 66 — Second-Quarter 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited results; management cautions that interim results are not necessarily indicative of full-year performance. Phillips 66 operates in Midstream, Chemicals, Refining, and Marketing and Specialties.
Financial performance and liquidity
- Second quarter: Sales and operating revenues were $24.1 billion, up 10% year over year. Net income attributable to Phillips 66 was $550 million versus $496 million; diluted EPS was $1.06 versus $0.93. Income before tax was $848 million and income tax expense was $267 million.
- First half: Sales and operating revenues were $47.0 billion, up 20%. Net income attributable to Phillips 66 was $1.085 billion versus $881 million; diluted EPS was $2.07 versus $1.65.
- Cash flow: Six-month operating cash flow was $1.316 billion, down from $1.413 billion. Inventory increases used $1.047 billion of cash, partly offset by a $724 million cash source from lower receivables. Capital expenditures and investments were $928 million. Management reported second-quarter operating cash flow of $1.865 billion.
- Margins and segments: Worldwide refining margin was $8.44 per barrel in Q2, up from $7.13. Q2 segment earnings were Midstream $59 million, Chemicals $196 million, Refining $224 million, and Marketing and Specialties $214 million; Corporate and Other recorded a $143 million loss. Refining, Midstream, and Chemicals earnings improved year over year, while Marketing and Specialties declined.
- Balance sheet at June 30: Cash was $2.161 billion; total debt was $9.965 billion, including $493 million short-term and $9.472 billion long-term. Debt-to-capital was 30%, unchanged from year-end. Total equity was $23.806 billion. The company reported approximately $5.6 billion of capacity available under credit facilities; no parent revolver borrowings or commercial paper were outstanding.
- Capital returns: First-half common dividends were $686 million, or $1.33 per share; share repurchases totaled $666 million. The Q2 dividend was $0.70 per share, and a further $0.70 dividend was declared in July, payable in September.
Material changes and unusual items
- First-half earnings included a $423 million pretax, noncash gain ($261 million after tax) from consolidating Merey Sweeny, L.P. (MSLP), after a long-running legal challenge to Phillips 66’s acquisition call right ended in February. This significantly boosted reported six-month earnings.
- Q2 earnings growth reflected higher realized refining margins and improved DCP Midstream equity earnings, partly offset by higher turnaround costs and interest expense and lower U.S. marketing margins.
- First-half earnings also benefited from higher refining margins and DCP Midstream results; increased turnaround costs, lower U.S. marketing margins, and higher interest expense were offsets. Refining utilization was 98% in Q2 versus 100% a year earlier, and 91% for the first half versus 97%.
- Debt issuance and repayment activity included $600 million of floating-rate notes and $900 million of term loans raised in April, followed by repayment of $1.5 billion of 2.95% notes at maturity and $135 million of MSLP debt. Floating-rate debt rose to 17% of total debt from 3% at year-end.
Outlook, risks, and contingencies
- No specific earnings or operating guidance is provided. Management said available cash, operating cash generation, and access to external funding are expected to meet near- and long-term needs, including capital spending, dividends, benefit contributions, debt repayment, and repurchases.
- Management expected approximately $425 million of additional U.S. benefit-plan contributions and $18 million of international contributions during the remainder of 2017.
- Results and cash flows are exposed to volatile crude oil, refined-product, NGL, natural-gas, and petrochemical prices and margins; refinery operations, turnarounds, feedstock availability, weather, and equity-affiliate distributions also affect performance. Management noted lower WTI prices during Q2 and seasonally stronger refining indicators.
- Environmental accruals were $476 million at June 30, expected to be spent substantially over the next 30 years. The company reported 30 sites with potential CERCLA or comparable state-law liability and said known contingencies are not currently expected to have a material adverse financial effect. Climate-related rules could increase costs, delay projects, or reduce demand.
- Guarantees include maximum future exposure of $554 million for the Houston headquarters lease and $350 million for railcar and aircraft leases. The remaining estimated railcar residual-value deficiency was $42 million. Indemnification liabilities were $197 million; management says maximum future payments generally cannot be reasonably estimated.
- Management identified no material change in reported risk factors or market-risk disclosures. Disclosure controls were assessed as effective at quarter-end.
Important facts for investors to verify
- How much of first-half earnings growth reflects recurring operations versus the $261 million after-tax MSLP gain, and the effect of the consolidation on Refining results and debt.
- Whether operating cash flow remains resilient as inventory levels and working-capital needs change; reconcile the Q2 cash-flow figure in management’s overview with the six-month cash-flow statement.
- Refining margins, utilization, turnaround spending, and U.S. marketing margins, alongside commodity-price and product-demand trends.
- Funding and execution of planned capital projects, dividends, repurchases, and the substantial expected second-half U.S. pension contribution.
- Exposure to floating rates, environmental remediation, lease guarantees, and changes in equity-affiliate distributions.