Here's Why Phillips 66's Stock Rallied Sharply in September

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What happened

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Several catalysts combined to drive shares of Phillips 66 (NYSE: PSX) 8.5% higher in September, which helped pull it out of the red for the year. Leading the charge was the company's quick recovery from Hurricane Harvey, which benefited certain refiners, and the announcement of a significant asset drop-down to its MLP Phillips 66 Partners (NYSE: PSXP).

So what

Hurricane Harvey battered the Houston area in late August, causing significant flooding and forcing many oil refineries to shut down operations. However, Phillips 66 quickly reopened its Sweeney refinery and Beaumont terminal, which enabled it to take advantage of higher market prices for refined products in the aftermath of the storm. Meanwhile, the company's Lake Charles refinery in Louisiana took delivery of oil from the U.S. Strategic Petroleum reserve so it could continue operating at full capacity and help keep the market supplied with refined products. Because of these factors, Phillips 66's third-quarter earnings could see a boost due to the jump in refining margins as a result of the storm.

In addition to all that storm-related activity, Phillips 66 found time to agree to the largest drop-down transaction to date with its MLP. The company sealed a deal to sell its 25% interest in the Bakken Pipeline and its Merey Sweeny unit to Phillips 66 Partners for $2.4 billion. Under the terms of the deal, Phillips 66 will receive about $1.5 billion in cash and $240 million of Phillips 66 Partners' units, while the MLP will also assume $625 million of existing debt. As such, the transaction will bolster Phillips 66's balance sheet, while providing it with significant cash proceeds.

That cash windfall is coming at a time when Phillips 66 is about to experience a meaningful uptick in free cash flow due to the upcoming completion of several major projects. That expected cash flow surge led an analyst at Scotia Howard Weil to upgrade the stock from sector perform to outperform while boosting the price target from $86 to $98. The analyst saw the expected boost in cash flow as a catalyst that should drive Phillips 66's stock higher in the near-term. 

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Now what

While Phillips 66's stock jumped last month, the company could continue moving higher. That's because the combination of the near-term margin boost from Harvey, along with the cash proceeds from Phillips 66 Partners, and the rising cash flow from its upcoming growth projects should give the company a significant amount of money that it can return to shareholders over the next year. Because of that, it's highly likely that Phillips 66 will give investors another considerable dividend increase and buy back a boatload of stock, which could fuel further gains in the stock price.

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Matthew DiLallo owns shares of Phillips 66. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.