Phillips 66 — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Phillips 66 is an energy manufacturing and logistics company with Midstream, Chemicals, Refining, and Marketing and Specialties operations. Amounts below are in U.S. dollars unless stated otherwise.
Key financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Sales and operating revenue | $23.103 billion | $23.595 billion |
| Income before income taxes | $340 million | $717 million |
| Net income attributable to Phillips 66 | $204 million | $524 million |
| Diluted EPS | $0.44 | $1.07 |
| Cash from (used in) operating activities | $(478) million | $488 million |
| Capital expenditures and investments | $1.097 billion | $328 million |
- Earnings declined 61%, mainly due to lower realized refining margins and reduced Chemicals earnings. Revenue fell about 2%.
- Refining reported a $198 million pretax loss, versus $112 million pretax income a year earlier. Worldwide realized refining margin fell to $7.23 per barrel from $9.29, and crude capacity utilization declined to 84% from 89%.
- Midstream pretax income increased to $316 million from $280 million, supported by transportation volumes, tariffs and storage rates. Chemicals pretax income declined to $227 million from $286 million; Marketing and Specialties declined to $205 million from $235 million.
- Operating cash flow was pressured by lower refining margins and unfavorable working capital, including discretionary inventory builds. Working-capital movements included a $1.790 billion cash use from inventories, partly offset by a $2.466 billion source from accounts payable.
Financial position and capital allocation
- At March 31, cash and cash equivalents were $1.253 billion, down from $3.019 billion at year-end 2018. Total debt was $11.298 billion, versus $11.160 billion; debt to capital was 30%, up from 29%.
- Total committed capacity available under revolving credit facilities was approximately $5.7 billion. Phillips 66 reported confidence that cash, operating cash flow and external funding sources would meet near- and long-term funding requirements.
- The company paid $364 million in common dividends ($0.80 per share) and repurchased $344 million of stock in the quarter. It had repurchased about $10.737 billion of shares under its $12 billion authorization since the program began.
- Capital expenditures and investments were $1.097 billion, including substantial Midstream project spending. Gray Oak joint venture partners contributed $422 million toward that project during the quarter.
Outlook, risks and unusual items
- No specific full-year earnings or cash-flow guidance was provided in the filing. Management highlighted the sensitivity of cash flows to volatile refining, marketing, NGL and chemicals margins, as well as refinery operating conditions and affiliate distributions.
- Management cited lower U.S. crack spreads, higher inventories and refinery downtime as pressures on refining results; lower NGL prices and weaker petrochemical margins also affected parts of the business.
- Phillips 66 Partners and co-venturers have a contingent equity contribution undertaking related to disputed Dakota Access permits. If specified conditions are met, Phillips 66 Partners’ potential share is up to approximately $631 million.
- Environmental accruals totaled $446 million. The company also disclosed residual-value guarantees of up to $554 million for its Houston headquarters lease and $288 million for railcar and aircraft leases, plus $207 million of guarantees for certain joint-venture debt and purchase obligations.
- The filing states that known contingencies are not currently expected to have a material adverse effect, but environmental, tax and legal estimates remain subject to change. Climate regulation could raise compliance costs, delay projects or reduce demand for hydrocarbon products.
- New lease accounting added $1.415 billion of operating lease right-of-use assets and corresponding liabilities at adoption on January 1, 2019. The company also adopted new credit-loss guidance and reclassified an $89 million tax benefit from accumulated other comprehensive loss to retained earnings.
Important facts for investors to verify
- Whether refining margins and refinery utilization recover, and how planned or unplanned downtime affects results.
- Whether working-capital needs and discretionary inventory builds continue to weigh on operating cash flow.
- Progress, spending and funding for Gray Oak and other Midstream projects, including the conditions and exposure under the Dakota Access undertaking.
- Whether affiliate distributions, particularly from DCP Midstream, CPChem and WRB, remain sufficient to support cash needs.
- Changes in total debt, available liquidity, dividends and share repurchases if operating cash flow remains weak.
- Updates to environmental, legal and lease-guarantee exposures, and potential effects of evolving climate and other regulations.