Phillips 66 — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Phillips 66 is a diversified energy company with Midstream, Chemicals, Refining, and Marketing and Specialties (M&S) segments. Results are unaudited and are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Sales and other operating revenues | $34.4 billion | $36.2 billion |
| Income before income taxes | $2.651 billion | $828 million |
| Net income attributable to Phillips 66 | $1.961 billion | $582 million |
| Diluted earnings per share | $4.20 | $1.29 |
| Cash from operating activities | $1.199 billion | $1.136 billion |
| Capital expenditures and investments | $378 million | $370 million |
- Revenue fell 5%, primarily reflecting lower prices for refined products, crude oil and NGL. Net income attributable to Phillips 66 more than tripled, mainly on improved realized refining margins; income tax expense also rose, to $574 million from $171 million.
- Worldwide realized refining margin was $20.72 per barrel, versus $10.83; refining segment pretax income was $1.608 billion, versus $173 million. Refining throughput was lower, while utilization increased to 90% from 89%.
- Segment pretax income: Midstream $702 million (prior year $212 million); Chemicals $198 million ($396 million); Refining $1.608 billion ($173 million); and M&S $426 million ($296 million). Midstream benefited from the DCP consolidation and improved NGL and other results; Chemicals weakened on lower margins.
- Operating cash flow rose modestly despite unfavorable working-capital movements and lower distributions from equity affiliates. Affiliate distributions were $369 million, down from $585 million.
- Cash and cash equivalents were $6.965 billion at quarter-end, up from $6.133 billion at year-end 2022. Total debt was $18.485 billion, up from $17.190 billion; debt-to-capital was 35%, versus 34%. The company reported approximately $6.2 billion of committed capacity available.
- Financing and capital returns included $1.25 billion of senior notes issued, $800 million of common-stock repurchases, and $486 million of dividends paid. The quarterly dividend was $1.05 per share, an 8% increase from the prior quarter.
Material changes and unusual items
- Phillips 66 began consolidating DCP Midstream Class A, DCP Sand Hills and DCP Southern Hills in August 2022. This changes the mix of consolidated results, debt and noncontrolling interests versus Q1 2022; segment reporting was also realigned, with prior periods recast for comparability.
- The company recorded a $36 million pretax gain from selling the Belle Chasse Terminal. Other income improved to $48 million from a $143 million loss, partly because the NOVONIX investment loss was $12 million versus $158 million in Q1 2022.
- Restructuring costs were $35 million for the enterprise-wide transformation and $12 million for DCP integration. The transformation targets at least $800 million of sustainable annual run-rate cost reductions and at least $200 million of lower annual sustaining capital by the end of 2023.
- Q1 cash flows included $2.003 billion of inventory investment, partly offset by working-capital benefits in receivables and prepaid items. Cash-flow movements may therefore not track earnings closely in this period.
Outlook, commitments and risks
- No specific full-year earnings guidance is provided in the supplied filing text. Management notes that cash flows depend heavily on volatile refining and marketing margins, NGL prices and chemicals margins, as well as refinery operations and affiliate distributions.
- The planned purchase of DCP LP public common units for $41.75 per unit was expected to close in Q2 2023, subject to customary conditions. It would raise Phillips 66’s economic interest from 43.3% to 86.8%, for approximately $3.8 billion in cash consideration. Funding was expected from operating cash, the notes offering and a $1.5 billion delayed-draw term loan; no term-loan borrowing was outstanding at March 31. The notes have a redemption provision tied to failure to complete the acquisition by December 31, 2023.
- On April 10, 2023, the company agreed to acquire U.S. West Coast marketing assets for approximately $260 million plus a working-capital adjustment; closing was expected in Q2 or early Q3, subject to regulatory and other conditions.
- Dakota Access litigation remains a contingent risk. Phillips 66’s 25% share of potential equity contributions under the contingent undertaking was approximately $467 million; the company could also face a share of ongoing costs if the pipeline were required to stop operating. The draft environmental impact statement was expected in Q2 2023.
- Environmental accruals were $439 million at March 31. The filing cites climate and emissions regulation, renewable-fuel compliance costs, commodity and margin volatility, operational disruptions, and legal and environmental liabilities as risks. California’s SBx 1-2 could impose gasoline-margin penalties and affect refinery maintenance; potential impacts were uncertain.
- A proposed final demand for more than $500,000 in stipulated Clean Air Act penalties was expected, relating to self-reported violations at four refineries. Management said known contingencies were not expected to materially adversely affect the consolidated financial statements, while noting estimates may change.
Important facts for investors to verify
- Whether and when the DCP LP public-unit acquisition closed, its final funding mix, and any resulting changes in debt and noncontrolling interests.
- Whether refining margins and refinery throughput remained supportive after the unusually strong Q1 improvement.
- Progress against the cost-reduction and sustaining-capital targets, including the distinction between realized savings and targets.
- Developments in the Dakota Access environmental review and litigation, and any effect on the contingent contribution exposure.
- Implementation and financial effects of California SBx 1-2, Clean Air Act penalty demands, and renewable-fuel compliance costs.