Phillips 66 — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2012; filed November 1, 2012. Financial statements are unaudited. Phillips 66 became a separately traded company on April 30, 2012. The third-quarter 2012 results represent Phillips 66 as a standalone company; nine-month 2012 results combine four months of predecessor downstream-business results and five months of Phillips 66 results. Comparisons with 2011 therefore are not fully like-for-like.
Financial performance
| Metric (millions of dollars, except per-share data) | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales and other operating revenues | 42,945 | 50,610 | 135,475 | 147,983 |
| Income before income taxes | 2,449 | 1,550 | 5,412 | 4,273 |
| Net income attributable to Phillips 66 | 1,599 | 1,049 | 3,416 | 2,764 |
| Diluted EPS | $2.51 | $1.65 | $5.37 | $4.36 |
Revenue declined, principally reflecting lower refining volumes after the Trainer refinery shutdown and lower natural gas liquids prices. Earnings increased 52% for the quarter and 24% for the nine-month period, primarily on stronger refining results. Reported revenue includes petroleum excise taxes.
- Refining & Marketing (R&M): Earnings were $1.648 billion for Q3 and $3.232 billion year to date, versus $785 million and $2.047 billion. Worldwide refining margin was $17.05 per barrel in Q3 versus $12.53, and $13.34 year to date versus $10.62. Worldwide utilization was 96% in Q3 versus 92%.
- Midstream: Loss of $77 million in Q3 and $79 million year to date, compared with earnings of $118 million and $290 million. Results included after-tax REX impairments of $133 million in Q3 and $170 million in Q2; lower NGL prices also weighed on DCP Midstream earnings.
- Chemicals: Earnings of $153 million in Q3 versus $193 million; year-to-date earnings of $577 million versus $568 million. Q3 reflected CPChem debt-extinguishment costs and asset impairments, partly offset by improved product margins.
- Corporate and Other: Loss of $125 million in Q3 and $314 million year to date, reflecting higher interest, standalone corporate expenses, and separation-related repositioning costs.
Cash flow, balance sheet and capital
- Nine-month operating cash flow was $2.991 billion, up from $2.275 billion. Capital expenditures and investments were $827 million; investing cash outflow was $668 million. Financing provided $2.080 billion, including $7.794 billion of debt issuance and $5.255 billion of distributions to ConocoPhillips. Cash ended the period at $4.430 billion.
- At September 30, total assets were $52.230 billion, current assets $21.873 billion, and current liabilities $16.386 billion. Short-term debt was $585 million and long-term debt $7.393 billion. Total equity was $20.606 billion.
- Phillips 66 had a $4 billion five-year revolving credit facility with no borrowings and $51 million of letters of credit outstanding. Its $1.2 billion receivables securitization facility also had no borrowings; $166 million of letters of credit were outstanding.
- During 2012, the company issued $5.8 billion of senior notes and closed a $2 billion variable-rate, three-year amortizing term loan; it retired about $185 million of prior debt. Management said senior debt ratings were investment grade and believed liquidity sufficient for operations and anticipated funding needs.
- Capital spending and investments were $827 million year to date, compared with $653 million. A potential acquisition of one-third interests in the Sand Hills and Southern Hills pipeline projects was expected to close in Q4 2012, with Phillips 66’s investment estimated at $700–$800 million.
Material developments, outlook and risks
- ConocoPhillips distributed all Phillips 66 shares to its stockholders on April 30, 2012. Phillips 66 made cash distributions to ConocoPhillips at separation and in June; the filing describes the net distribution as $5.3 billion.
- The board authorized up to $1 billion of share repurchases in July. By September 30, the company had repurchased 2.6 million shares for $111 million. The board declared a $0.25-per-share quarterly dividend in October, a 25% increase from the prior quarter.
- Hurricane Sandy prompted shutdown of the Bayway refinery before the storm. At the time of the filing, the refinery remained shut and the company had no restart forecast while assessing damage.
- No specific consolidated earnings guidance is provided. Management noted refining and marketing margins, NGL and chemicals prices, refinery operations, and affiliate distributions as key drivers of cash flow. CPChem was forecast to remain self-funding through 2012.
- Management said further noncash impairments of properties or equity investments were reasonably possible following its planned annual review. Environmental accruals were $533 million, with substantial expenditures expected over the next 30 years. Potential replacement costs for previously purchased invalid RINs were estimated at up to approximately $150 million before tax, though not reasonably estimable.
- Other notable exposures include a disputed MSLP ownership call right, with arbitration hearings scheduled for December 2012; guarantees of joint-venture debt and other obligations; and commodity-price, regulatory, environmental, litigation, weather, and project-execution risks. Management stated known contingency costs exceeding accruals by a material amount were considered remote based on information then available.
Most important facts for investors to verify
- How the post-separation reporting basis affects comparability, particularly for nine-month results and corporate costs.
- Bayway’s storm damage, restart timing, and operational impact.
- Further REX or other asset impairments, and the assumptions behind future impairment reviews.
- Actual funding, timing, and economics of the planned Sand Hills and Southern Hills pipeline investment.
- Resolution and potential cost of invalid RIN exposure, environmental matters, and the MSLP arbitration.
- Debt costs, liquidity availability, and cash returned through dividends and repurchases.