2 Reasons Phillips 66 Is a Better Growth Stock Than Valero Energy Corporation

By Matthew DiLallo Markets Fool.com

The refining industry in America isn't a growth industry by any means. In fact, the country hasn't built a new large-scale refinery since the late 1970s. Because of that, refiners like Phillips 66 (NYSE: PSX) and Valero Energy (NYSE: VLO) have had to look for other ways to grow, such as expanding existing facilities, making acquisitions, or diversifying into adjacent industries.

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One thing Phillips 66 has done to set itself apart from most other refiners is to expand well outside the sector by investing capital in both its midstream business focused on natural gas liquids (NGL)and its chemicals operations. As a result, it has more ways to grow than Valero.

Image source: Getty Images.

Drilling down into Valero's growth

While the refining industry isn't a fast-growing segment, refiners still do have opportunities to grow. That's evident by the amount of capital that the refiners plan to allocate toward growth projects this year. Valero expects to spend $1.1 billion on growth projects, including capacity expansions at two of its plants.

That said, the company does have some non-refining investments,including a plan to spend $256 million on the construction of the Diamond Pipeline with Plains All American Pipeline (NYSE: PAA). That 50-50 joint venture will supply oil from the Cushing oil hub in Oklahoma to Valero's Memphis, Tennessee, refinery. Plains All American Pipeline expects this project to enter service later this year.

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While that project will expand Valero's midstream business, the bulk of its logistic assets supports the company's refining business. In fact, while its master limited partnership (MLP)Valero Energy Partners (NYSE: VLP) did recently make its first third-party acquisition, acquiring a 40% stake in the Red River pipeline from Plains All American Pipeline, that pipeline also supports Valero's Ardmore, Oklahoma, refinery. In other words, nearly all of Valero's growth strengthens its core refining business.

Drilling down into Phillips 66's growth

Contrast this budget with Phillips 66's. The company and its various affiliates expect to spend nearly $2.4 billion on expansion projects this year. The bulk of that growth will be in the company's midstream business both at its wholly owned operations, as well as within its MLPs Phillips 66 Partners (NYSE: PSXP) and DCP Midstream (NYSE: DCP).

While some of those investments support Phillips 66's core refining business, the company's midstream business has expanded well beyond simply supporting that segment. For example, the company recently completed the construction of an LPG export facility and is in the process of increasing capacity at its Beaumont Terminal, which connects with eight refineries along the Gulf Coast. Meanwhile, Phillips 66 Partners operates not just crude and refined product assets, but also NGL pipelines and fractionation assets, while DCP Midstream's entire focus in on natural gas and NGLs. Furthermore, both of those MLPs expect to invest several hundred million dollars this year in expanding their gas-focused infrastructure to keep up with demand from producers.

Aside from operating a large and growing midstream business, Phillips 66 also owns a stake in a chemicals joint venture with Chevron (NYSE: CVX). Those partners are in the process of completing a $6 billion expansion in the Gulf Coast -- to take advantage of low natural gas prices in the U.S. thanks to the shale boom -- which will increase the venture's global capacity by a third. Meanwhile, given the growing shale gas output in the U.S., it's possible that the partners could invest in additional growth projects in the years ahead.

Investor takeaway

Valero's only clearly visible way to grow is continuing to expand its refining capacity and logistics assets. Phillips 66, on the other hand, has that and more. Not only can it also grow its refining business and related logistics assets, but it owns a chemicals joint venture and several NGL-focused midstream assets. Those additional growth vehicles make it a better growth stock than Valero.

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Matt DiLallo owns shares of Phillips 66. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.