Phillips 66 — Q2 2015 Form 10-Q
Business context and period: Phillips 66 is an energy manufacturing and logistics company operating in Midstream, Chemicals, Refining, and Marketing and Specialties. This unaudited quarterly filing covers the three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods unless noted.
Financial performance and position
| Metric | Q2 2015 | Six months 2015 | Comparable period |
|---|---|---|---|
| Sales and operating revenues | $28.512 billion | $51.290 billion | Down 37% and 40%, respectively, mainly due to lower commodity and product prices |
| Income from continuing operations attributable to Phillips 66 | $1.012 billion | $1.999 billion | Up 17% and 16%, respectively |
| Diluted EPS from continuing operations | $1.84 | $3.63 | Q2: $1.51; six months: $2.98 |
| Operating cash flow | $1.427 billion | $2.779 billion | Six-month 2014: $2.228 billion |
| Capital expenditures and investments | $1.213 billion | $2.294 billion | Six-month 2014: $1.133 billion |
| Dividends paid | $302 million | $574 million | $0.56 per share in Q2; $1.06 per share for six months |
Q2 net income attributable to Phillips 66 was $1.012 billion versus $863 million. Six-month reported net income was $1.999 billion versus $2.435 billion; the 2014 figure included $706 million from discontinued operations, principally the PSPI transaction gain. The effective tax rate was 30% for Q2 and 29% for the first half, versus 36% and 34% in 2014.
Balance sheet and liquidity at June 30, 2015: Cash and equivalents were $5.089 billion, total debt $8.965 billion, total equity $23.223 billion, and total assets $49.874 billion. Debt-to-capital was 28%, unchanged from year-end 2014. No borrowings were outstanding under the company’s $5 billion revolving facility or Phillips 66 Partners’ $500 million facility; approximately $5.4 billion of total facility capacity was available. Cash declined $118 million from year-end.
Material changes and segment results
- Refining: Q2 earnings rose to $604 million from $390 million, principally on improved realized margins and crack spreads, partly offset by lower volumes from maintenance. Worldwide utilization was 90%, versus 96% a year earlier.
- Marketing and Specialties: Q2 earnings increased to $314 million from $162 million, reflecting the ICHP deferred gain and higher marketing volumes.
- Chemicals: Q2 earnings declined to $295 million from $324 million, mainly from lower ethylene margins, weaker equity-affiliate earnings, and higher turnaround costs. Insurance proceeds related to the 2014 Port Arthur fire benefited both 2015 periods; proceeds were finalized in Q2.
- Midstream: Q2 recorded a $78 million loss versus $108 million earnings. DCP Midstream’s $427 million goodwill impairment reduced Phillips 66’s equity earnings by $126 million after tax; lower NGL, crude oil, and natural gas prices also weighed on results.
Second-quarter earnings from continuing operations benefited from stronger refining results and a previously deferred gain on the 2013 sale of the Immingham Combined Heat and Power Plant. Phillips 66 recognized the remaining $132 million deferred gain in Q2; $242 million was recognized in the first half. Total net gains on dispositions were $139 million for Q2 and $261 million for the half year.
Cash deployment, outlook, and risks
- First-half operating cash flow was supported by favorable working-capital movements and a $696 million CPChem special distribution. This distribution was reported in operating cash flow; CPChem funded it through $1.4 billion of senior notes. DCP Midstream made no distributions in the first half, and management did not expect distributions for the remainder of 2015.
- Phillips 66 Partners issued $1.1 billion of notes and raised $384 million net from a public unit offering, partly financing its $1.010 billion acquisition of pipeline interests from Phillips 66. Phillips 66 owned 69% of its limited partner interests and 2% of its general partner interest at quarter-end.
- Management said available cash, operating cash generation, and access to external funding were expected to meet funding needs. The board declared a $0.56 quarterly dividend in July and management forecast a further double-digit dividend-rate increase in 2016. The filing provides no earnings or revenue guidance.
- Key operating sensitivities include volatile refining, marketing, chemicals, and NGL margins and prices; refinery throughput and maintenance; and equity-affiliate distribution decisions. Other risks include project execution, transportation access, regulation, environmental remediation, litigation, and climate-related requirements.
- Environmental accruals were $469 million at June 30, 2015, versus $496 million at year-end; substantial spending may occur over the next 30 years. Management judged it remote that known contingencies would exceed current accruals enough to materially harm consolidated financial statements, while noting estimates may change.
- Phillips 66 guaranteed $173 million of MSLP debt; other disclosed exposures include $402 million of lease residual-value guarantees and $119 million of other guarantees. The MSLP ownership dispute with PDVSA remains unresolved. Two new regulatory matters were disclosed, including a $147,000 settlement demand concerning Rodeo Refinery notices and an EPA notice involving the Wood River refinery.
Important facts for investors to verify
- Whether stronger refining margins and marketing results persist, particularly given lower refinery utilization and commodity-price volatility.
- The extent and duration of DCP Midstream’s impairment-related and commodity-price pressures, including the absence of expected 2015 distributions.
- How recurring earnings and cash generation compare with reported results that include the ICHP gain and CPChem’s special distribution.
- Funding needs for capital projects, benefit-plan contributions, dividends, and buybacks, and the effect of Phillips 66 Partners’ debt and noncontrolling interest.
- Developments in environmental and legal exposures, the PDVSA/MSLP dispute, and rail-safety regulation affecting crude-oil railcars.