Phillips 66 — 2022 Form 10-K Summary
Business context and reporting period
Phillips 66 is a diversified energy company operating in Midstream, Chemicals, Refining, and Marketing and Specialties. This filing covers the fiscal year ended December 31, 2022; the supplied text reports annual results, not standalone fourth-quarter results. The company realigned its segments in 2022 and recast prior periods for comparability.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Sales and other operating revenues | $170.0 billion | $111.5 billion |
| Income before income taxes | $14.6 billion | $1.7 billion |
| Net income attributable to Phillips 66 | $11.0 billion | $1.3 billion |
| Diluted earnings per share | $23.27 | $2.97 |
| Net cash from operating activities | $10.8 billion | $6.0 billion |
| Cash and cash equivalents at year-end | $6.1 billion | $3.1 billion |
| Total debt at year-end | $17.2 billion | $14.4 billion |
| Total equity at year-end | $34.1 billion | $21.6 billion |
Debt-to-capital was 34%, down from 40%. The company reported approximately $6.7 billion of committed credit capacity available at year-end; its $5 billion revolving facility and commercial-paper program had no outstanding borrowings. 2022 cash uses included $2.2 billion for capital expenditures and investments, $1.8 billion for common dividends, $1.5 billion for share repurchases, and $2.4 billion of debt repayments.
- Refining: Pre-tax income was $7.8 billion versus a $2.4 billion loss. Worldwide realized refining margin rose to $21.55 per barrel from $7.42; crude capacity utilization increased to 90% from 84%.
- Midstream: Pre-tax income was $4.7 billion versus $1.5 billion. Results included substantial gains from the DCP Midstream/Gray Oak transaction and consolidation.
- Chemicals: Pre-tax income fell to $856 million from $1.8 billion, reflecting weaker margins, higher feedstock and utility costs, and lower equity-affiliate results.
- Marketing and Specialties: Pre-tax income rose to $2.4 billion from $1.7 billion, primarily on improved international marketing fuel margins and specialty results.
Material changes and unusual items
Net income increased sharply, driven by stronger refining margins and a $3.013 billion pre-tax gain associated with the DCP Midstream and Gray Oak transaction. The gain included $2.831 billion from remeasurement of previously held equity interests and $182 million from transferring an interest in Gray Oak Pipeline. The company also recorded a $433 million unrealized investment loss on NOVONIX, compared with a $365 million unrealized gain in 2021. Total impairment charges fell to $60 million from $1.498 billion, which included the 2021 Alliance Refinery impairment.
In August 2022, Phillips 66 began consolidating DCP Midstream Class A Segment, DCP Sand Hills, and DCP Southern Hills. The transaction added acquired assets and liabilities and changed reported segment results and noncontrolling interests. Phillips 66 completed its acquisition of the remaining Phillips 66 Partners interests in March 2022.
Outlook, management commentary, and risks
- Management budgeted approximately $2.0 billion of 2023 capital expenditures and investments, including $1.1 billion of growth capital; about half of growth capital is expected to support lower-carbon opportunities. Separate expected spending by CPChem and WRB was approximately $1.1 billion.
- The company is targeting at least $800 million of sustainable annual run-rate cost reductions and $200 million of sustaining-capital reductions by year-end 2023 through its business transformation.
- Management targets returning $10–12 billion to shareholders through dividends and repurchases from July 1, 2022 through December 31, 2024, subject to board discretion and business needs. The quarterly dividend was raised to $1.05 per share in February 2023.
- A January 2023 agreement provides for acquiring publicly held DCP LP common units for $41.75 per unit, approximately $3.8 billion in cash, increasing Phillips 66’s economic interest from 43.3% to 86.8%. Closing was expected in the second quarter of 2023 and remained subject to customary conditions.
- Major risks include volatile commodity prices and refining, chemical, and marketing margins; operational outages and severe weather; environmental and climate regulation; renewable-fuel credit (RIN) costs; litigation and permitting; and execution risks in large projects and the DCP integration. 2022 RIN expenses were $478 million for wholly owned refineries and $437 million for the company’s share of joint ventures.
- Contingencies include a potential Dakota Access contribution of up to approximately $467 million for Phillips 66’s 25% share under a contingent equity undertaking if litigation results in an unfavorable final judgment. The company also disclosed expected penalties exceeding $300,000 in a Wood River Refinery consent-decree enforcement matter.
Most important facts for investors to verify
- How much of 2022 earnings and cash generation is repeatable after excluding the $3.013 billion DCP-related gain and considering commodity-margin conditions.
- The final purchase-price allocation and integration performance for the DCP assets, and the financing and closing outcome of the approximately $3.8 billion DCP LP unit acquisition.
- Refining margins, utilization, maintenance requirements, and the schedule, cost, and permits for the Rodeo renewable-fuels conversion.
- Whether the cost-reduction and capital-spending targets are achieved while funding dividends, repurchases, and planned investments.
- Potential exposure from Dakota Access litigation, environmental proceedings, RIN requirements, and other guarantees and commitments.
The financial statements received an unqualified audit opinion. Management and the auditor concluded internal control over financial reporting was effective, but the assessment excluded the acquired DCP-related entities, which represented approximately 22% of year-end assets and 3% of 2022 revenues and other income.