Phillips 66 — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Phillips 66 is an energy manufacturing and logistics company with Midstream, Chemicals, Refining, and Marketing and Specialties businesses. Figures are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Sales and operating revenues | $28.980B | $24.087B | $52.575B | $46.981B |
| Net income attributable to Phillips 66 | $1.339B | $550M | $1.863B | $1.085B |
| Diluted earnings per share | $2.84 | $1.06 | $3.87 | $2.07 |
| Cash provided by operating activities | $2.4B | Not stated in the overview | $2.852B | $1.316B |
| Dividends per common share | $0.80 | $0.70 | $1.50 | $1.33 |
Revenue comparisons are affected by the January 1, 2018 adoption of the revenue standard: petroleum excise taxes are now presented net rather than gross. Thus revenue and taxes-other-than-income-tax lines are not directly comparable with 2017. Higher commodity prices also contributed to reported revenue growth.
Management reported Q2 earnings growth of $789 million (143%) and six-month earnings growth of $778 million (72%). Key drivers were stronger realized refining margins, improved Midstream and Chemicals affiliate earnings, lower turnaround costs for the six-month period, and lower tax rates following U.S. tax reform. Offsets included higher interest expense and increased earnings attributable to noncontrolling interests. The prior-year six-month comparison also included a $261 million after-tax gain from consolidating Merey Sweeny, L.P.
Segment results
| Net income | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Midstream | $202M | $96M | $435M | $208M |
| Chemicals | $262M | $196M | $494M | $377M |
| Refining | $910M | $224M | $1.001B | $483M |
| Marketing and Specialties | $237M | $214M | $421M | $355M |
| Corporate and Other | ($207M) | ($149M) | ($362M) | ($279M) |
Worldwide realized refining margin was $12.28 per barrel in Q2, versus $8.44 a year earlier; six-month margin was $10.88 versus $8.49. Worldwide refinery utilization was 100% in Q2 and 94% for the six-month period, compared with 98% and 91%, respectively, in 2017. Chemicals benefited from full operations at new U.S. Gulf Coast assets; Midstream benefited from higher volumes and affiliate earnings.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $1.884 billion, down from $3.119 billion at December 31, 2017.
- Six-month operating cash flow was $2.852 billion. Capital expenditures and investments were $866 million; dividends were $699 million; common-stock repurchases were $3.743 billion; and debt repayments were $260 million, including a $250 million term-loan repayment.
- Total debt was $11.364 billion, up from $10.110 billion at year-end; debt to total capital increased to 31% from 27%. Total equity was $24.960 billion, down from $27.428 billion.
- The company reported approximately $5.8 billion of committed credit capacity available at quarter-end and no direct borrowings under its $5.0 billion revolving credit facility or supported commercial-paper program. Phillips 66 Partners also had no borrowings under its $750 million revolver.
- In March, Phillips 66 issued $1.5 billion of senior notes, including $500 million floating-rate notes due 2021, $800 million of 3.900% notes due 2028, and $200 million of 4.875% notes due 2044. It also repaid $250 million of a term loan in June.
Outlook, risks and notable items
- The filing gives no consolidated earnings or revenue guidance. Management said existing cash, operating cash generation and external funding access are expected to meet near- and long-term needs, including capital spending, dividends, benefit-plan contributions, debt repayments and repurchases.
- Major projects include the Gray Oak crude pipeline, expected in service by the end of 2019 with approximately $2 billion total cost and initial capacity of 800,000 barrels per day; and a Sweeny Hub expansion expected in late 2020. Management also expects CPChem and DCP Midstream to self-fund their capital programs for the remainder of 2018.
- On July 11, 2018, the board declared a quarterly dividend of $0.80 per share, payable September 4, 2018. The board’s share-repurchase authorization totals up to $12.0 billion. Separately, Phillips 66 repurchased 35 million shares from Berkshire Hathaway-related entities in February for $3.280 billion; the transaction was funded partly with cash and partly with borrowings subsequently refinanced through senior notes.
- Management identifies volatile crude oil, NGL, natural gas, refined-product and petrochemical prices and margins as significant drivers of cash flow. Other risks include refinery downtime, feedstock and transportation availability, project execution and permitting, regulation, weather, joint-venture decisions, and litigation and environmental obligations.
- Environmental accruals were $465 million at June 30, 2018. The company reported 29 unresolved sites with potential liability under Superfund or comparable state laws. Management said it did not currently expect known contingencies to have a material adverse effect, while noting estimates may change.
- Guarantees include up to $554 million of exposure under the headquarters lease and $291 million under railcar and airplane leases; joint-venture debt guarantees had aggregate maximum potential payments of approximately $256 million. A railcar residual-value deficiency of $56 million was estimated, with $24 million remaining unrecognized at quarter-end.
- Adoption of the new lease standard is expected to materially increase reported assets and liabilities through recognition of right-of-use assets and operating lease liabilities; management does not expect a material income-statement or cash-flow impact.
- Effective tax rates were 23% for Q2 and 22% for the six-month period, compared with 31% and 30% in 2017, primarily reflecting the reduction in the U.S. federal corporate tax rate. Tax Act accounting remained provisional and could change.
Important facts for investors to verify
- Assess how sustainable Q2’s higher refining margins and the resulting earnings increase are, including sensitivity to crude differentials, product cracks and unplanned downtime.
- Separate underlying revenue growth from the accounting change in excise-tax presentation when comparing periods.
- Track cash generation against large buybacks, dividends, capital investment and higher debt; confirm that liquidity remains adequate as projects advance.
- Monitor Gray Oak and Sweeny Hub costs, schedule, shipper commitments, ownership options and expected returns.
- Review future distributions from equity affiliates, which management says it cannot control and which are not assured.
- Follow updates to tax-reform estimates, environmental accruals, lease-standard implementation and contingent guarantees.