Phillips 66 — Form 10-Q Summary
Business context and reporting period
Phillips 66 is a diversified energy company with Midstream, Chemicals, Refining, and Marketing and Specialties (M&S) segments. This unaudited 10-Q covers the quarter and nine months ended September 30, 2023. Results are not necessarily indicative of full-year performance.
Comparisons are affected by the August 2022 DCP Midstream consolidation and a $3.0 billion merger-related gain recorded in 2022. In June 2023, Phillips 66 acquired DCP LP’s publicly held common units for approximately $3.8 billion, increasing its aggregate economic interest in DCP LP from 43.3% to 86.8%.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Sales and operating revenues | $39.6B | $45.0B | $109.1B | $129.7B |
| Income before income taxes | $2.8B | $7.2B | $7.7B | $12.1B |
| Net income attributable to Phillips 66 | $2.1B | $5.4B | $5.8B | $9.1B |
| Diluted EPS | $4.69 | $11.16 | $12.59 | $19.31 |
| Cash from operating activities | $2.7B | Not stated here | $4.8B | $6.1B |
Revenue declined mainly with lower prices for refined products, crude oil, and NGL. Earnings fell substantially year over year, primarily because Q3 2022 included approximately $3.0 billion of pretax gains related to the DCP Midstream merger, and because refining margins were lower. Nine-month operating cash flow was down from $6.1 billion, reflecting lower earnings, reduced equity-affiliate distributions, and higher pension contributions.
- Q3 segment pretax income: Midstream $712 million; Chemicals $104 million; Refining $1.71 billion; M&S $633 million; Corporate and Other loss $346 million.
- Worldwide realized refining margin was $18.96 per barrel in Q3, down from $26.87; refining pretax income was $1.71 billion, versus $2.91 billion. Refinery utilization rose to 95% from 91%.
- Q3 M&S pretax income declined to $633 million from $828 million, principally due to lower international marketing margins and affiliate earnings, partly offset by stronger U.S. margins.
- At September 30, cash was $3.54 billion, total debt $19.44 billion, total equity $31.99 billion, and debt-to-capital 38% (34% at December 31, 2022). Cash was $6.13 billion at year-end 2022.
- Nine-month capital expenditures and investments were $1.78 billion; common dividends paid were $1.43 billion and share repurchases were approximately $2.9 billion. Financing also included $3.96 billion to repurchase noncontrolling interests, primarily in DCP LP.
- Approximately $6.3 billion of committed borrowing capacity was available; Phillips 66’s $5 billion revolver and $5 billion commercial paper program were undrawn.
Material changes and notable items
- The DCP LP public-unit acquisition was accounted for as an equity transaction. Phillips 66 funded the approximately $3.8 billion cash payment using operating cash, note proceeds, and term-loan borrowings.
- Debt increased from $17.2 billion at December 31, 2022. In March, the company issued $1.25 billion of senior notes, and it had drawn $1.25 billion under a term loan due in June 2026.
- Phillips 66 sold its 25% interest in South Texas Gateway Terminal for $275 million and recognized a $101 million pretax gain. It also acquired a West Coast marketing business for $269 million to support distribution of renewable diesel.
- Q3 commodity-derivative activity resulted in a net loss of $872 million, compared with a $620 million gain in Q3 2022. The filing describes derivatives as instruments used to manage exposures and market opportunities; results can be volatile.
Outlook, risks, and contingencies
- In October 2023, management raised its July 2022 through year-end 2024 shareholder-return target to $13–$15 billion and said it plans to return at least 50% of net cash from operations through dividends and repurchases. The board approved a further $5 billion increase in repurchase authorization. Repurchases and dividends remain discretionary.
- Management expects over $3 billion of proceeds from planned sales of non-core assets. It said the company was on track to exceed prior year-end 2023 annual run-rate targets of $800 million in cost reductions and $200 million in sustaining-capital reductions, and set year-end 2024 targets of $1.1 billion and $300 million, respectively.
- The board approved an approximately $520 million increase to the 2023 planned capital budget, including additional funding for the Rodeo Renewed project and the West Coast marketing acquisition. Total estimated Rodeo project cost is approximately $1.25 billion; 2023 project spending is expected to be about $200 million above its initial budget.
- Results and cash flow remain sensitive to volatile refining, marketing, chemicals, and NGL margins and prices, refinery operations, and affiliate distribution decisions. Management cautions that forward-looking targets depend on market conditions and execution.
- The Dakota Access Pipeline’s Lake Oahe easement remains subject to an environmental review. The U.S. Army Corps of Engineers’ draft EIS listed alternatives including denial of an easement and pipeline shutdown; no final decision was expected before 2024. Phillips 66’s maximum potential share of contingent equity contributions was approximately $467 million. A shutdown could materially affect results and cash flows.
- Environmental accruals were $453 million at September 30, 2023. The company also disclosed lease residual-value guarantees, other joint-venture guarantees, and letters of credit and bank guarantees supporting $1.1 billion of performance obligations. Management said known contingent liabilities are not currently expected to exceed accruals by a material amount.
- The company reported no material change in risk factors. Disclosure controls were assessed as effective; integration of DCP-related entities into the internal control environment was completed during the quarter.
Important facts for investors to verify
- How earnings and operating cash flow perform as refining margins and commodity prices change, and whether current shareholder-return plans remain supported by cash generation.
- Progress toward the stated 2024 cost and sustaining-capital reduction targets, planned non-core asset sales, and the increased 2023 capital budget.
- Debt levels, floating-rate exposure, and borrowing needs following the DCP LP acquisition and ongoing repurchases.
- The USACE’s final Dakota Access decision and any resulting operating, litigation, or contingent funding exposure.
- Whether the Rodeo Renewed project remains on budget and schedule and achieves its intended renewable-fuels and commercial benefits.