Phillips 66 — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Phillips 66 is an energy manufacturing and logistics company operating in Midstream, Chemicals, Refining, and Marketing and Specialties. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales and operating revenue | $21.849B | $28.512B | $39.258B | $51.290B |
| Net income attributable to Phillips 66 | $496M | $1.012B | $881M | $1.999B |
| Diluted EPS | $0.93 | $1.84 | $1.65 | $3.63 |
| Dividends per share | $0.63 | $0.56 | $1.19 | $1.06 |
- Six-month operating cash flow was $1.413B, down from $2.779B. Capital expenditures and investments were $1.370B, versus $2.294B. Cash and equivalents ended June at $2.232B, down from $3.074B at year-end 2015.
- Total debt was $8.862B, versus $8.887B at December 31, 2015; debt-to-capital was 27%. The balance included $1.532B short-term debt, chiefly notes due in 2017 reclassified from long-term debt.
- Phillips 66 reported approximately $5.4B of available capacity under credit facilities. No commercial paper or borrowings under its $5B revolver were outstanding; Phillips 66 Partners had $40M outstanding on its revolver.
- Total assets were $50.361B and total equity was $24.066B at June 30, 2016.
Material changes and segment results
- Net income attributable to Phillips 66 fell 51% in Q2 and 56% in the first half year over year. Management cited lower refining margins and lower Chemicals margins, as well as the absence of a prior-year disposition gain; higher Midstream equity earnings partly offset the declines.
- Refining earnings were $149M in Q2, compared with $604M; first-half earnings were $235M, compared with $1.142B. Worldwide refining margin declined to $7.13 per barrel from $11.70, while crude throughput rose and utilization reached 100% in Q2 versus 90%.
- Chemicals earnings decreased to $190M from $295M in Q2 and to $346M from $498M in the first half, mainly on lower olefins and polyolefins margins and weaker SA&S affiliate earnings and volumes.
- Marketing and Specialties earnings were $229M versus $314M in Q2 and $434M versus $618M in the first half. Improved marketing margins partly offset lower lubricants results and the absence of the prior-year gain.
- Midstream earned $39M in Q2 versus a $78M loss, and $104M for the first half versus an $11M loss. Improvement reflected higher DCP Midstream earnings, including the prior-year comparison being affected by a $126M after-tax goodwill impairment at DCP in Q2 2015.
Outlook, management commentary, risks and unusual items
- Management said commodity prices improved from Q1 2016 but remained below Q2 2015 levels. High product inventories and refinery utilization pressured crack spreads; the filing provides no specific earnings or revenue guidance.
- Management expects available cash, operating cash generation, and access to external funding to meet capital spending, dividends, pension contributions, debt repayment, and share repurchases. It noted that margins and prices are volatile and equity-affiliate distributions are not assured. DCP Midstream was not eligible to make owner distributions under its amended credit facility at June 30.
- Phillips 66 paid $625M in common dividends and repurchased $633M of stock in the first half. The board declared a $0.63-per-share dividend payable September 1, 2016. The company’s share-repurchase authorization had $1.971B remaining at June 30.
- The company recorded no material new legal proceedings in Q2. Environmental accruals were $486M, with a substantial portion expected to be spent over the next 30 years. Management said known contingency costs exceeding accruals were not expected to have a material adverse impact, while noting estimates can change.
- Potential exposures include a $140M guarantee of MSLP debt, a $554M maximum residual-value guarantee on the new Houston headquarters lease, and up to approximately $330M of exposure under crude-oil railcar residual-value guarantees if market prices remain low. The filing also describes ongoing environmental, legal, tax, regulatory, commodity-price, project-completion, and joint-venture risks.
- Unusual comparability items included $132M of deferred gain recognized in Q2 2015 and $242M in the first half of 2015 from the 2013 sale of the Immingham power plant. Planned LIFO inventory liquidations reduced 2016 net income by approximately $15M in Q2 and $58M in the first half.
Key facts for investors to verify
- Whether refining and Chemicals margins recover, and how utilization, inventories, and commodity prices affect results.
- The sustainability of operating cash flow and affiliate distributions, particularly given the first-half decline in affiliate distributions and DCP’s distribution restrictions.
- Funding needs for capital projects, pension contributions, dividends, and buybacks relative to cash and available credit.
- Potential changes in environmental, legal, tax, railcar, lease-guarantee, and joint-venture exposures.
- How asset contributions and equity offerings at Phillips 66 Partners affect parent-company liquidity, ownership, and noncontrolling interests.