Phillips 66 — First-Quarter 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Comparisons are with the three months ended March 31, 2015, unless otherwise stated. Phillips 66 operates in midstream, chemicals, refining, and marketing and specialties. Dollar amounts below are in millions unless noted.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Sales and operating revenues | $17,409 | $22,778; down 24% |
| Net income attributable to Phillips 66 | $385 | $987; down 61% |
| Diluted earnings per share | $0.72 | $1.79 |
| Cash provided by operating activities | $258 | $1,352 |
| Capital expenditures and investments | $750 | $1,081 |
| Cash and cash equivalents at quarter-end | $1,723 | $3,074 at Dec. 31, 2015 |
| Total debt | $8,835 | $8,887 at Dec. 31, 2015 |
| Total equity | $23,643 | $23,938 at Dec. 31, 2015 |
Operating cash flow included a $590 tax refund. Inventory builds and lower realized refining margins weighed on cash generation; cash declined by $1,351 during the quarter. The company spent $391 on share repurchases and paid $296 in common dividends ($0.56 per share). Debt-to-capital was 27%, within management’s stated 20%–30% target. No borrowings were outstanding under the company’s $5 billion revolver or its $5 billion commercial paper program; approximately $5.4 billion of combined facility capacity was available.
Refining segment earnings fell to $86 from $538, with worldwide refining margins of $7.11 per barrel versus $12.26. Worldwide refinery utilization rose to 94% from 84%, partly offsetting weaker margins. Chemicals earnings were $156 versus $203; Midstream earnings were $65 versus $67; Marketing and Specialties earnings were $205 versus $304. The effective tax rate was 33%, compared with 28%.
Material changes versus the prior period
- Management attributed the earnings decline primarily to lower realized refining margins and lower olefins and polyolefins margins.
- Lower petroleum, crude oil, and NGL prices reduced reported revenue and purchased-product costs. Equity earnings declined 27%, mainly because of lower results from WRB Refining and CPChem, partly offset by higher DCP Midstream earnings.
- Marketing and Specialties results also lacked the prior-year deferred gain from the 2013 sale of the Immingham power plant: $110 was recognized in Q1 2015.
- Operating cash flow was substantially lower year over year, notwithstanding the $590 tax refund; management cited quarter-to-quarter inventory timing and lower refining margins.
Outlook, commentary, risks, and unusual items
- Management forecast a double-digit percentage increase in the quarterly dividend rate during 2016. The filing provides no specific earnings or operating guidance.
- Management said existing cash, operating cash flow, and access to external financing were expected to meet near- and long-term funding needs, including capital spending, dividends, benefit-plan contributions, debt repayment, and repurchases. Capital spending and investment totaled $750 in Q1; 2016 full-year spending guidance is not stated in the provided filing text.
- The business environment included low commodity prices, narrower WTI-Brent differentials, weaker crack spreads amid high product inventories, and compressed chemicals-chain margins. Results and cash flows remain sensitive to commodity prices, refining and marketing margins, chemicals margins, refinery operations, and equity-affiliate distributions.
- Inventory LIFO liquidations reduced Q1 2016 net income by approximately $43 (versus $36 in Q1 2015); management said planned inventory reductions were not expected to be replaced by year-end.
- Environmental accruals were $488 at March 31, 2016, versus $485 at year-end; the company expects substantial related spending over the next 30 years. It reported 35 unresolved sites with potential liability under environmental laws.
- Phillips 66 guaranteed $157 of Merey Sweeny senior notes, maturing in 2019. The related ownership dispute remained under appeal. Other disclosed exposures include residual-value guarantees of up to $382 and recorded indemnification liabilities of $195; some indemnifications have no estimable maximum exposure.
- The company said it did not expect known contingency costs beyond current accruals to have a material adverse effect based on information then available, while noting environmental, tax, and legal estimates are subject to change. It also highlighted uncertainty around future greenhouse-gas regulation and crude-oil railcar residual values.
- No material changes to the previously disclosed risk factors were reported, and no new reportable legal matters or material developments were identified for the quarter.
Important facts for investors to verify
- Whether refining and chemicals margins recover, and whether high refinery utilization can be sustained without offsetting margin pressure.
- The sustainability of cash generation after the one-time $590 tax refund and the effects of inventory movements and working capital.
- Progress against capital plans, the announced dividend increase, and continued share repurchases relative to available cash and debt levels.
- Developments in environmental remediation, the Merey Sweeny appeal and guarantee, railcar lease residual-value exposure, and other indemnification or legal contingencies.
- Future distributions and funding requirements of equity affiliates, including WRB, CPChem, and DCP Midstream.