Phillips 66 — Q1 2017 Form 10-Q
Business context and reporting period
Phillips 66 is an energy manufacturing and logistics company with Midstream, Chemicals, Refining, and Marketing and Specialties operations. This unaudited report covers the three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Management cautions that quarterly results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Sales and other operating revenues | $22.894 billion | $17.409 billion; up 32% |
| Income before income taxes | $797 million | $596 million |
| Net income attributable to Phillips 66 | $535 million; $1.02 per diluted share | $385 million; $0.72 per diluted share; earnings up 39% |
| Operating cash flow | $(549) million | $258 million provided |
| Capital expenditures and investments | $470 million | $750 million |
| Common dividends paid | $326 million; $0.63 per share | $296 million; $0.56 per share |
Cash and cash equivalents were $1.513 billion at quarter-end, down from $2.711 billion at December 31, 2016. Total debt was $10.210 billion, versus $10.138 billion; debt-to-capital was 30% at both dates, within the company’s stated 20%–30% target range. Total equity was $23.725 billion. Phillips 66 reported approximately $5.5 billion of available capacity under its credit facilities; it had no borrowings under its $5 billion revolving facility and no commercial paper outstanding. Current assets were $12.170 billion and current liabilities were $8.730 billion.
Operating cash flow was pressured by seasonal inventory builds and a smaller tax refund than in the prior-year quarter. Investing activities provided $158 million, including $325 million of collections on related-party loans and $318 million of restricted cash received with the MSLP consolidation. Financing activities used $686 million, including $285 million of share repurchases. The resulting net decrease in cash, cash equivalents and restricted cash was $1.075 billion.
Material changes and segment performance
Quarterly earnings rose $150 million, primarily because of Refining. Phillips 66 began consolidating Merey Sweeny, L.P. (MSLP) in February after its acquisition call right was no longer subject to legal challenge. The remeasurement generated a $423 million noncash, pretax gain included in other income. The consolidation also added $238 million of debt and $318 million of restricted cash.
| Segment earnings attributable to Phillips 66 | Q1 2017 | Q1 2016 |
|---|---|---|
| Midstream | $77 million | $65 million |
| Chemicals | $181 million | $156 million |
| Refining | $259 million | $86 million |
| Marketing and Specialties | $141 million | $205 million |
| Corporate and Other | $(123) million | $(127) million |
Refining benefited from the MSLP gain and improved realized margins, but higher turnaround costs and lower utilization were offsets. Worldwide refining utilization fell to 84% from 94%, while worldwide refining margins rose to $8.55 per barrel from $7.11. Chemicals earnings improved on higher olefins and polyolefins volumes, better benzene margins, and a CPChem business-sale gain, partly offset by turnaround costs and an affiliate impairment. Midstream improved on NGL margins and DCP Midstream results. Marketing and Specialties declined mainly on lower U.S. marketing margins and lower affiliate earnings.
Revenue growth largely reflected higher prices for petroleum products, crude oil and NGL; purchased crude oil and products increased 48%. Equity earnings from affiliates increased 10%. The effective tax rate decreased to 29% from 33%, mainly due to the relative contribution of lower-tax foreign earnings and recognition of excess share-based compensation tax benefits.
Outlook, management commentary and risks
Management stated that cash on hand, operating cash generation and access to external funding are expected to meet near- and long-term needs, including capital spending, dividends, benefit contributions, debt repayment and repurchases. The filing provides no specific full-year earnings or revenue guidance. Management expects CPChem to self-fund its 2017 capital program. The company expected DAPL and ETCOP commercial operations to begin by June 1, 2017; construction was reported complete.
After quarter-end, Phillips 66 issued $600 million of floating-rate notes and obtained $900 million of term loans, intending to use proceeds in part to refinance 2017 senior notes, as well as for capital spending and general corporate purposes. These borrowings increase floating-rate exposure; the filing reported floating-rate debt at 3% of total debt at March 31.
Key exposures include volatile commodity prices and refining, marketing and petrochemical margins; refinery maintenance and operating performance; project execution, permits and transportation access; and decisions by joint ventures that affect distributions. Environmental remediation, litigation, tax matters and changing environmental or climate regulations may also affect results. Environmental accruals were $511 million at March 31, compared with $496 million at year-end; management said it did not expect known contingencies to exceed accruals by an amount that would materially adversely affect consolidated financial statements. DAPL/ETCOP exposure was $1.163 billion, including equity investments and Phillips 66’s share of project borrowings. The filing also identifies maximum future exposures of $554 million under the headquarters lease residual-value guarantee and $356 million for railcar and airplane lease guarantees; the estimated remaining railcar deficiency was $54 million.
Most important facts for investors to verify
- How much of the $535 million in attributable earnings reflects repeatable operating performance versus the $423 million noncash MSLP remeasurement gain and other unusual items.
- Whether operating cash flow recovers after the inventory build, and how working capital, taxes and affiliate distributions affect cash generation.
- Whether refining utilization and turnaround costs improve, and whether the segment’s margin gains persist.
- How post-quarter financing affects debt, interest costs and floating-rate exposure, and whether refinancing of 2017 maturities proceeds as planned.
- Progress and financial exposure related to DAPL/ETCOP, environmental remediation, and lease guarantees.
- Whether capital spending, dividends and share repurchases remain supportable if commodity prices or margins weaken; repurchases totaled $285 million in the quarter.