Phillips 66 — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Phillips 66 is an energy manufacturing and logistics company with Midstream, Chemicals, Refining, and Marketing and Specialties businesses. Amounts below are in U.S. dollars; financial-statement amounts are in millions except per-share data.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenues and other income | $26,417 | $41,048 | $78,920 | $128,486 |
| Income from continuing operations attributable to Phillips 66 | $1,578 | $1,180 | $3,577 | $2,909 |
| Net income attributable to Phillips 66 | $1,578 | $1,180 | $3,577 | $3,615 |
| Diluted EPS | $2.90 | $2.09 | $6.52 | $6.28 |
| Cash provided by operating activities | $1,437 | Not stated in the filing text | $4,216 | $2,657 |
For the nine-month comparison, 2014 net income included $706 million from discontinued operations, principally the PSPI share exchange gain; continuing-operations earnings are more comparable. The filing does not provide a consolidated gross or operating margin. Worldwide refining margin was $13.96 per barrel in Q3 2015 versus $10.89 in Q3 2014, and $12.68 versus $10.15 for the nine-month periods.
- Cash and liquidity: Cash and cash equivalents were $4,822 at September 30, down from $5,207 at year-end 2014. Phillips 66 reported approximately $5.4 billion of available capacity under credit facilities and no commercial-paper borrowings.
- Debt and equity: Total debt was $8,951, versus $8,684 at year-end; debt-to-capital was 27%, compared with 28%. The company’s adjusted debt-to-capital ratio, excluding Phillips 66 Partners’ debt and noncontrolling interest, was 25%, within its stated 20%–30% target range.
- Investment and shareholder returns: Nine-month capital expenditures and investments were $3,286. Common dividends paid were $874, and share repurchases were $1,106. Quarterly dividend per share increased to $0.56 from $0.50 a year earlier.
Material changes versus prior periods
- Q3 continuing-operations earnings rose $398 million, or 34%, primarily on improved refining and marketing margins. Lower commodity prices drove sales and purchased-crude/product costs down 36% and 45%, respectively.
- Refining earnings increased to $1,003 from $558 in Q3; worldwide refining margin rose to $13.96 per barrel. Nine-month refining earnings were $2,145 versus $1,254, despite lower utilization over the nine-month period.
- Midstream earnings declined to $101 from $115 in Q3 and to $90 from $411 year to date, mainly reflecting weaker DCP Midstream results amid lower NGL, crude oil, and natural gas prices. DCP Midstream recorded $460 million of goodwill impairment, reducing Phillips 66’s year-to-date equity earnings by $128 million after tax.
- Chemicals earnings increased to $252 from $230 in Q3, but fell to $750 from $870 year to date, with lower ethylene margins and lower affiliate earnings among the drivers.
- Marketing and Specialties earnings decreased to $338 from $368 in Q3, partly because the prior-year quarter included recognition of a deferred disposal gain. Nine-month earnings increased to $956 from $667, including recognition of $242 million of deferred gain related to the 2013 ICHP sale.
- Nine-month operating cash flow increased to $4,216 from $2,657. Management cited working-capital benefits from lower commodity prices and reduced receivables, partly offset by lower affiliate distributions.
Outlook, commentary, risks, and unusual items
- Management forecast approximately $5.8 billion of 2015 capital expenditures and investments, including a subsequent $1.5 billion cash contribution to DCP Midstream; the transaction closed October 30, 2015. The company’s interest in DCP Midstream remained 50%.
- The announced 2016 capital budget was $3.6 billion for Phillips 66 plus $0.3 billion for Phillips 66 Partners. Management forecast a further double-digit dividend-rate increase in 2016.
- Management estimated fourth-quarter 2015 inventory reductions could increase operating cash flow by approximately $700 million. This is a forecast, not a reported result.
- Key business sensitivities include volatile refining and marketing margins, commodity prices, chemicals margins, refinery uptime and turnarounds, affiliate distribution decisions, project execution, transportation availability, and regulatory and environmental requirements.
- Environmental accruals were $490 million at September 30, 2015, versus $496 million at year-end 2014; the company expected substantial expenditures over the next 30 years. Management stated known contingency costs were not expected to materially adversely affect consolidated financial statements, while noting estimates may change.
- Other notable items: Q3 pension settlement expense included $73 million for the U.S. qualified pension plan; the related remeasurement increased the net pension liability by $116 million and reduced other comprehensive income. The company guaranteed $173 million of MSLP senior notes and reported $210 million in recorded indemnification liabilities.
Most important facts for investors to verify
- Whether stronger refining and marketing margins persist and offset continued Midstream and Chemicals pressures.
- Actual fourth-quarter cash generation versus management’s estimated $700 million inventory-related benefit, and the drivers of nine-month working-capital changes.
- Funding, expected returns, and execution risks for the DCP Midstream contribution and major Midstream projects.
- How environmental, legal, pension, and guarantee exposures develop relative to recorded accruals.
- Whether announced capital spending, dividend growth, and share repurchases remain consistent with cash generation and the company’s leverage target.