Phillips 66 quarterly report, Q2 FY2014

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Phillips 66 — Q2 2014 Form 10-Q

Business context and period: Phillips 66 is an energy manufacturing and logistics company operating in Midstream, Chemicals, Refining, and Marketing and Specialties (M&S). This unaudited filing covers the quarter and six months ended June 30, 2014; comparative segment results were recast for a January 2014 reporting realignment.

Financial performance and position

  • Q2 revenue: $45.5 billion, up 5% from $43.2 billion in Q2 2013. Phillips 66-attributable net income was $863 million, down 10% from $958 million; diluted EPS was $1.51 versus $1.53. Continuing-operations diluted EPS was $1.51 in both periods.
  • First-half results: Revenue was $85.8 billion versus $84.4 billion. Attributable net income was $2.44 billion versus $2.37 billion, including a $706 million after-tax discontinued-operations gain associated with the PSPI share exchange. Continuing-operations attributable income declined to $1.73 billion from $2.34 billion; diluted continuing-operations EPS was $2.98 versus $3.72.
  • Cash flow: Operating cash flow was $2.23 billion for the first half, down from $3.18 billion. Q2 operating cash flow was $830 million. First-half capital expenditures and investments were $1.13 billion, versus $748 million a year earlier.
  • Cash and liquidity: June 30 cash was $4.96 billion, down from $5.40 billion at year-end 2013. Approximately $5.4 billion of capacity remained available under credit and receivables facilities.
  • Debt and capital: Total debt was $6.21 billion, versus $6.16 billion at year-end; debt-to-capital was 22%, within the stated 20%–30% target range. Floating-rate debt was 1% of total debt. Total equity was $21.96 billion.
  • Shareholder returns: Q2 dividends paid were $281 million and share repurchases were $616 million. The quarterly dividend increased to $0.50 per share, about 28% above the prior quarter. First-half dividends were $510 million and repurchases were $1.26 billion.

Material changes and segment results

  • Midstream: Q2 earnings increased 20% to $108 million; first-half earnings rose 47% to $296 million. Higher transportation throughput, DCP Midstream results, and NGL margins contributed.
  • Chemicals: Q2 earnings increased 79% to $324 million; first-half earnings rose 38% to $640 million. Improved ethylene and polyethylene margins, higher volumes, and lower turnaround costs helped.
  • Refining: Q2 earnings declined 14% to $390 million; first-half earnings fell 49% to $696 million. Worldwide refining margin was $9.66 per barrel in Q2 versus $9.70, and $9.77 for the first half versus $11.68. Higher throughput partly offset weaker market crack spreads.
  • M&S: Q2 earnings fell 53% to $162 million; first-half earnings declined 44% to $299 million. Lower marketing margins, rising gasoline spot prices relative to wholesale prices, and lower renewable-fuels blending credits weighed on results. Prior-year periods also benefited from businesses subsequently sold and a biodiesel tax credit program.
  • Corporate and Other: Q2 loss was $121 million versus $126 million; first-half loss was $202 million versus $221 million.

Outlook, commentary, and risks

  • Management cited weaker refining crack spreads and M&S margins as the main drivers of the Q2 earnings decline, partly offset by better Chemicals results. Industry commodity prices and margins are volatile and materially affect operating cash flow.
  • A fire at CPChem’s Port Arthur ethylene unit in early July could keep the facility shut until a possible Q4 2014 restart; management expected negative effects on CPChem results in Q3 and Q4.
  • In July, the board increased the 2014 planned capital budget by $1.2 billion to support acquisitions and Midstream growth projects. Management forecast annual double-digit dividend-rate increases in 2015 and 2016. These are forward-looking expectations, not guarantees.
  • The company expected a purchase of a Beaumont-area storage terminal to close in Q3 2014, subject to regulatory approvals, and acquired Spectrum Corporation in July, funded with cash.
  • Environmental accruals were $504 million, compared with $492 million at year-end; substantial spending is expected over the next 30 years. Management said it considered a material adverse effect from known contingencies remote, while noting estimates could change.
  • PDVSA petitioned to vacate an arbitration ruling affirming Phillips 66’s exercise of a call right over its MSLP interest; Phillips 66 will continue equity-method accounting while the matter remains unresolved. The company also disclosed environmental and other legal proceedings, and guaranteed $203 million of MSLP debt.

Important facts for investors to verify

  • Assess recurring earnings separately from the $696 million pretax PSPI exchange gain and related discontinued-operations income.
  • Track CPChem’s Port Arthur restart timing and the resulting impact on affiliate earnings.
  • Monitor refining and marketing margins, including whether higher throughput can offset weaker spreads and costs.
  • Evaluate the sustainability of cash flow and affiliate distributions, particularly after the unusual WRB special distribution.
  • Follow capital spending, acquisitions, repurchases, dividend plans, and updates to environmental and MSLP-related exposures.