2016 wasn't a great year for refiners, in general, and Phillips 66's (NYSE: PSX) most recent earnings report didn't really do anything to change that narrative. Lower refining margins led to a sharp decline in profitability, while the company tried to run the business as usual.
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Getting through these tough years is part of the game when it comes to long-term investing, and Phillips 66 wants to reward investors for their patience in 2017. Here's a quick rundown of Phillips 66's most recent results, and a look at why 2017 should be a better year for the oil-refining giant.
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By the numbers
|Results*||Q4 2016||Q3 2016||Q4 2015|
|Earnings per share||$0.31||$0.96||$1.20|
*in millions, except per-share data. Source: Phillips 66 earnings release.
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Like the prior quarter, the largest impact on profitability was the decline in its refining segment, which was mostly attributed to refining margins rather than operations. Sure, there was a modest decline in refinery utilization, but that was mostly attributed to some turnaround-related work at its Los Angeles refinery.
The largest culprit was the overall refining margin that fell all the way to$6.47 per barrel compared to $9.41 per barrel this time last year. Like we have seen with other refiners this past quarter,a few cents on a refining margin can lead to a large change on the bottom line.
In regards to the other businesses, it was a bit of a grab bag of challenges. Declines in its midstream business were due to a $34 million net charge related to the recent restructuring at DCP Midstream (NYSE: DCP) that caused some tax implications for Phillips 66. Chemical results were also down from higher levels of turnaround work at some of its olefins and polyolefins facilities. Finally, lower margins for retail and marketing sales were too much to offset, even though Phillips 66 did increase its petroleum product exports to 175,000 barrels per day.
Source: Phillips 66 earnings release. Author's chart.
Capital spending for the year ended up being $2.8 billion, which is considerably lower than the $3.9 billion it intended to spend. For the coming year, capital spending -- including investments at all of its equity investments and joint ventures -- is expected to be $3.8 billion. Much of that spending will go toward the completion of its CPChem joint venture petrochemicals plant that is expected to be completed in the fourth quarter of the year. The company has also commissioned the construction of 1.2 million barrels of new crude storage at its Beaumont, Texas terminal.
It's also worth noting that the company dropped down about $1.3 billion in assets to its midstream subsidiary Phillips 66 Partners (NYSE: PSXP). These dropdowns should lead to higher cash distributions from the partnership. It's also safe to say that, eventually, Phillips 66's stake in the Dakota Access Pipeline and the Energy Transfer Crude Oil Pipeline will be dropped down to Phillips 66 Partners once complete.
What management had to say
Last quarter, CEO Greg Garland talked about the rationale behind the reduction in capital spending. This quarter was a little less detail specific as he reiterated the same themes management has been espousing for some time.
We achieved record safety performance and refining utilization rates, started up the Freeport LPG export facility and returned$2.3 billionto shareholders through dividends and share repurchases. However, fourth-quarter financial results were disappointing, and reflect challenging market conditions.
We expect to generate additional free cash flow and create shareholder value as we complete major growth projects in 2017. Our portfolio of refining, midstream, chemicals and marketing assets positions us to capture opportunities across the value chain. We remain committed to operating excellence and growing our higher-valued businesses, while maintaining a strong balance sheet and disciplined capital allocation.
2017 is looking like it will be a good year for the company. The consolidation of DCP Midstream into a single entity should help alleviate some of the capital constraints on the company, while being more beneficial for Phillips 66 over time. Also, the company expects to see results from its Freeport LPG export terminal and its CPChem petrochemical plant by the end of the year. The added capacity from these big-time investments should help to offset any potential weakness from refining margins should this refining environment continue throughout the year.
Having those assets online will be handy because the company will need the additional cash to meet its capital spending requirements and any further ambitions to raise its dividend and buy back shares -- two things management has prided itself upon as a means for enhancing shareholder value.
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