Phillips 66 — Q2 2012 Form 10-Q
Business context and reporting period
Phillips 66 reported for the quarter and six months ended June 30, 2012. The company became an independent, publicly traded downstream business following its separation from ConocoPhillips on April 30, 2012. Accordingly, 2012 results combine the pre-separation downstream businesses with Phillips 66’s post-separation results; Q2 includes one month before and two months after separation, while the six-month period includes four months before and two months after. Comparisons with 2011 are therefore not fully like-for-like, and pre-separation corporate costs were allocated by ConocoPhillips.
Its businesses are Refining and Marketing (R&M), Midstream (including a 50% interest in DCP Midstream and 25% in Rockies Express Pipeline), and Chemicals (a 50% interest in CPChem).
Financial and operating highlights
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales and operating revenues ($m) | 46,747 | 52,594 | 92,530 | 97,373 |
| Net income attributable to Phillips 66 ($m) | 1,181 | 1,039 | 1,817 | 1,715 |
| Diluted EPS | $1.86 | $1.64 | $2.86 | $2.70 |
| Cash from operating activities ($m) | Not separately provided in the filing’s cash flow statement | 1,073 | 1,538 |
- Q2 earnings increased 14%; six-month earnings increased 6%. Lower commodity prices reduced revenue and purchased-product costs.
- Q2 worldwide R&M refining margin was $12.56 per barrel, versus $9.49; six-month margin was $11.40, versus $9.63. Worldwide refining utilization was 93% versus 91% in Q2.
- Q2 segment earnings: R&M $1,184m versus $774m; Midstream loss $91m versus income of $111m; Chemicals $207m versus $190m; Corporate and Other loss $119m versus $36m.
- At June 30, cash was $3,104m; total assets $48,575m; total liabilities $29,596m. Debt was $7,986m, including $590m short-term and $7,396m long-term.
- Operating cash flow fell to $1,073m from $1,538m, reflecting working-capital effects from falling commodity prices, partly offset by stronger refining and marketing margins. Capital expenditures and investments were $488m.
Material changes, unusual items, and outlook
- Trainer refinery and related assets were sold for $229m, generating a $189m pre-tax gain ($106m after tax). The sale contributed to higher R&M earnings.
- The company recorded a $275m pre-tax impairment of its REX investment, reducing Midstream earnings by about $170m after tax. A separate $42m impairment related to equipment from the canceled Wilhelmshaven refinery upgrade.
- Q2 inventory reductions caused a LIFO liquidation that increased net income by $67m.
- Phillips 66 made cash distributions to ConocoPhillips around the separation; the filing reports a net distribution of $5.3bn after considering cash retained and cash flows. It issued $5.8bn of senior notes and closed a $2.0bn variable-rate term loan; debt increased substantially from year-end 2011.
- Liquidity included an undrawn $4.0bn revolving credit facility and an undrawn $1.2bn receivables facility; letters of credit were outstanding under both. Management said it expected liquidity to be adequate for operations, investment, dividends, debt service, and contingencies.
- On July 11, 2012, the board declared a $0.20-per-share quarterly dividend. On July 31, it authorized up to $1bn in share repurchases, expected to begin in Q3. These are post-quarter actions, not Q2 cash outflows.
- Management cited stronger domestic and European crack spreads in Q2, while lower natural gas liquids prices weighed on Midstream. It provided no specific consolidated earnings or revenue guidance; it forecast DCP Midstream and CPChem to remain self-funding through 2012.
- Other matters to monitor include a possible up to $150m pre-tax exposure for replacement of potentially fraudulent renewable identification numbers (RINs); $538m of environmental accruals; litigation and environmental obligations; and guarantees, including $242m of MSLP debt. The MSLP ownership dispute with PDVSA was scheduled for arbitration hearings in December 2012.
Most important facts for investors to verify
- How much of the reported year-over-year earnings increase is attributable to stronger underlying operations versus the Trainer sale, LIFO liquidation, and other unusual items.
- The post-separation cost base and comparability of reported results, given the mixed pre- and post-separation periods and allocated historical expenses.
- Performance and valuation of the REX investment, DCP Midstream, and exposure to lower NGL prices; verify the expected benefit from DCP’s revised depreciable lives.
- Debt repayment plans, variable-rate term-loan exposure, access to undrawn facilities, and the funding impact of the dividend and share-repurchase authorization.
- Potential outcomes and financial effects of the RIN matter, environmental and legal contingencies, guarantees, and the MSLP arbitration.