Phillips 66 Bounces Back With a Big Profit Beat

By Matthew DiLallo Markets Fool.com

After facing several challenges last year, Phillips 66 (NYSE: PSX) enjoyed a bit of a bounce back in the first quarter. The refiner delivered expectation-smashing results, reporting an adjusted profit of $294 million, or $0.56 per share, which was a remarkable $0.51 per share ahead of the consensus estimate. Fueling the quarter were robust chemicals results and improving midstream earnings, which more than overcame continued weakness in the refining segment.

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Drilling down into the results

Here's a snapshot at how this quarter compared to the previous one, as well as the year-ago period.

Data source: Phillips 66. Chart byauthor. Figures in millions.

As that chart shows, the standout performer this quarter was the company's chemicals segment, which consists of its 50-50 CPChem joint venture with Chevron (NYSE: CVX). Fueling the strong results were several items, including improving margins, higher volumes, and lower operating costs due in part to the completion of a recent turnaround.

The other highlight this quarter was the midstream business. That segment benefited from a full quarter of Phillips 66's recently completed Freeport LPG Export Terminal as well as a turnaround in results at DCP Midstream (NYSE: DCP). After causing the company to record a loss on its investment last quarter, the DCP Midstream investment was back in the green this quarter, benefiting from hedging and lower costs. Meanwhile, the company's other MLP investment, Phillips 66 Partners (NYSE: PSXP), delivered another steady quarter thanks to that entity's focus on owning stable fee-based assets.

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Finally, the lone laggard this quarter was once again the refining segment, which still couldn't pull out of the red. While the segment delivered a significant improvement from last quarter due to higher margins, those positives were offset by higher costs and lower volumes due to turnaround activities. That said, with most of its major turnarounds now in the rearview mirror, the segment should have one less weight dragging down future results.

Image source: Getty Images.

A look at what's ahead

Phillips 66 and its affiliates are in the process of completing several major projects, which should further lessenthe impact of refining volatility. The largest is in the chemicals segment, where Phillips 66 and Chevron are putting the finishing touches on a $6 billion Gulf Coast petrochemical expansion. The companies expect to bring two new polyethylene units online by midyear and start up the new ethane cracker in the fourth quarter. These projects will boost CPChem's global capacity by one-third and should fuel earnings growth in future quarters.

Meanwhile, a noteworthy project in the midstream segment finally finished construction in the quarter, after the company and its joint venture partners Energy Transfer Partners (NYSE: ETP) and Sunoco Logistics Partners (NYSE: SXL)completed the controversial Dakota Access Pipeline and Energy Transfer Crude Oil Pipeline. The partners expect commercial operations to begin this June, which means that this pipeline should drive incremental earnings for Phillips 66 in the back half of this year.

In addition to that, Phillips 66 completed an additional capacity expansion of its Beaumont Terminal during the quarter, bringing its storage capacity up to 9 million barrels. The company has a further 1.2-million-barrel expansion expected to come online by midyear and is in the process of increasing its export capacity from 400,000 barrels per day up to 600,000 barrels per day. These expansions will also bolster the earnings capacity of the midstream segment.

Finally, both of Phillips 66's MLPs have several projects underway to drive growth in 2017 and beyond. At Phillips 66 Partners, progress continues on the Bayou Bridge Pipeline, which it's building with Energy Transfer and Sunoco Logistics Partners. The partners expect this project to enter commercial service by the end of this year. Meanwhile, Phillips 66 Partners announced that it is developing a new isomerization unit at a Phillips 66 refinery, with final approval of the project expected early next year. Over at DCP Midstream, work continues on its Sand Hills Pipeline expansion, which should enter service this year. In addition, the company is constructing a new gas processing plant in the DJ Basin that should start up by the end of next year. Finally, DCP Midstream signed on as an anchor shipper and partner for Kinder Morgan's (NYSE: KMI) proposed Gulf Coast Express Pipeline Project. Initially, Kinder Morgan thought this would be a $1 billion project to build up to 1.7 billion cubit feet per day of natural gas transportation capacity. However, bids for capacity have significantly exceeded the proposed plan, which could lead the company to increase the size of this project.

Clearly, 2017 will be a busy year for Phillips 66, as it has several expansion projects entering service in both its chemicals and midstream segments. Meanwhile, the bulk of its future growth appears as though it will come from its MLPs, which are both working on several exciting development projects.

Investor takeaway

Thanks to its diversified portfolio, Phillips 66's earnings rebounded after a challenging 2016 as improvements in its chemicals and midstream businesses offset continued headwinds in refining. Those two segments should continue to drive results this year given the slew of new projects the company expects to complete by year's end. Meanwhile, with most of its major refinery turnarounds now complete, and conditions in the industry starting to improve, 2017 should be a much better year for Phillips 66.

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Matt DiLallo owns shares of Kinder Morgan and Phillips 66 and has the following options: short January 2018 $30 puts on Kinder Morgan and long January 2018 $30 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.