Phillips 66 — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Phillips 66 is an energy manufacturing and logistics company with Midstream, Chemicals, Refining, and Marketing and Specialties operations.
Financial performance
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Sales and operating revenues | $21.627 billion | $20.878 billion; up 4% |
| Loss before income taxes | $771 million | $2.478 billion loss |
| Net loss attributable to Phillips 66 | $654 million; $1.49 per diluted share | $2.496 billion loss; $5.66 per diluted share |
| Operating cash flow | $271 million | $217 million |
| Capital expenditures and investments | $331 million | $923 million |
| Total debt | $15.422 billion | $15.893 billion at December 31, 2020 |
| Cash and cash equivalents | $1.351 billion | $2.514 billion at December 31, 2020 |
| Total equity | $20.457 billion | $21.523 billion at December 31, 2020 |
The reported loss narrowed substantially year over year, principally because impairment charges fell to $198 million from $3.006 billion. Excluding impairments, management said results decreased, mainly due to lower realized refining and marketing fuel margins and lower sales volumes. Purchased crude oil and products rose 9%, faster than revenue. Interest and debt expense increased 32%, to $146 million, reflecting higher average debt and lower capitalized interest.
Cash from operations was supplemented by $502 million of distributions from equity affiliates, versus $361 million a year earlier. Cash uses included $331 million of capital expenditures and investments, $500 million of repayment of maturing debt, $394 million of common dividends, and a $155 million additional member loan to an affiliate. The quarterly dividend was $0.90 per share. Cash declined by $1.163 billion during the quarter.
At March 31, total committed capacity available under revolving credit facilities was approximately $5.3 billion. No borrowings were outstanding under Phillips 66’s $5 billion revolver; Phillips 66 Partners had $450 million outstanding under its $750 million facility. Total debt to capital was 43%, compared with 42% at year-end 2020. A $1.5 billion income tax receivable, expected to be refunded within 12 months, was included in receivables.
Segments and material changes
- Midstream: Income before tax was $76 million versus a $702 million loss. The comparison benefited from the prior-year $1.161 billion DCP Midstream impairment; excluding that charge, DCP results declined, in part due to commodity risk-management activity. Phillips 66 Partners recorded a $198 million impairment after deciding to exit the Liberty Pipeline project.
- Chemicals: Income before tax was $154 million, down from $169 million. Winter-storm disruption reduced production and sales volumes and increased utility, maintenance, and repair costs; stronger margins partly offset these effects.
- Refining: A $1.040 billion pretax loss, improved from a $2.261 billion loss that included a $1.845 billion goodwill impairment in Q1 2020. Excluding the prior-year impairment, results declined. Worldwide realized refining margin was $4.36 per barrel versus $7.11, and crude-oil capacity utilization was 74% versus 83%.
- Marketing and Specialties: Income before tax was $290 million versus $513 million. Lower realized fuel margins and weaker demand weighed on results; U.S. realized fuel margin was $1.94 per barrel versus $2.08, while international margin was $4.01 versus $8.53.
Revenue growth reflected higher prices for refined products, crude oil, and NGL, partly offset by lower volumes. Equity earnings from affiliates fell 22%. The 2020 comparison also included a $1.161 billion DCP Midstream investment impairment and $1.845 billion Refining goodwill impairment; Q1 2021 included the Liberty impairment.
Outlook, risks, and contingencies
Management reported that refined-product demand began recovering after vaccine distribution early in 2021 and refining margins improved. It also noted higher NGL prices and stronger chemicals margins. However, COVID-19 impacts and the depth and duration of the economic recovery remained uncertain. February winter storms disrupted Central and Gulf Coast operations, reducing utilization and increasing costs. Management said it continues to monitor assets and investments for optimization and impairment, and further impairments may be required. The filing provides no numerical earnings or full-year financial guidance.
Key exposures include volatile commodity prices and refining, marketing, and chemical margins; demand uncertainty; operational and weather disruptions; and evolving environmental and greenhouse-gas regulation. Environmental accruals were $437 million at March 31, 2021. The company also disclosed a Dakota Access/ETCO contingent equity contribution undertaking with Phillips 66 Partners’ maximum potential share of approximately $631 million. Litigation over the Lake Oahe easement remained unresolved; a motion seeking a permanent pipeline shutdown could be decided at any time, while the U.S. Army Corps of Engineers’ environmental review was expected by March 2022. Other disclosed exposures include headquarters and equipment lease residual-value guarantees of $885 million combined and $197 million of other joint-venture and purchase-obligation guarantees. Management stated that it did not expect known contingency costs beyond accruals to materially adversely affect consolidated financial statements.
In April 2021, Phillips 66 Partners borrowed $450 million under a term loan due April 5, 2022, primarily to repay borrowings under its revolving facility. It also transferred its Liberty interest to its co-venturer for cash and pipeline assets. These are subsequent events, not Q1 balance-sheet transactions.
Important facts for investors to verify
- Whether demand recovery, refining margins, and refinery utilization improve after the pandemic and winter-storm disruptions.
- The cash and earnings impact of the Dakota Access litigation, possible injunction, and related contingent funding obligations.
- Whether the $1.5 billion tax refund is received within the expected 12 months and how working-capital movements affect cash generation.
- Whether further impairments arise, particularly given management’s stated ongoing portfolio review.
- The sustainability of cash flow and dividends relative to capital needs, debt service, affiliate distributions, and available liquidity.