On Sep 23, we issued an updated research report on one of the world's largest independent refiners, Phillips 66 (PSX). The company is an integrated downstream company with a leading position in all three of its business segments: Refining & Marketing, Gas Gathering & Processing, and Petrochemicals. The company’s business strategy is to de-emphasize refining, while aggressively expanding its two other businesses to maximize return on capital by investing in profitable growth, while controlling costs.
The company intends to grow its cash dividend and repurchase its shares, while maintaining financial flexibility. We believe this unique asset mix, as well as large and balanced operational scale, gives a competitive advantage to Phillips 66 throughout its business cycles.
Our bullishness stems from the refiner’s diversified presence across the U.S. supported by extensive transportation and logistics assets, which provide a steady supply of crude from domestic, Canadian and international sources. We believe management’s steady dividend increases, the ongoing share repurchase program and recent acquisition of Beaumont Terminal could further boost shareholder value. However, we find the current valuation fair and adequately reflecting the company’s growth prospects. Moreover, Phillips 66’s capital intensive core business is also faced with a high degree of volatility. This is expected to limit its ability to post positive earnings surprises.
We like Phillips 66’s geographically diversified refiner presence. The company’s 15 refineries, which enable it to participate in various market opportunities, provide an advantage over region-specific competitors. Further, most of Phillips 66’s refineries are integrated with transportation, marketing and commercial operations that provide crude supply flexibility. These refineries benefit from strong margins because of low feedstock costs thanks to higher proportion of onshore crude sources, which offer a distinct cost advantage over seaborne crudes. Phillips 66 also owns or has interests in three refineries in Europe and one in Asia.
Phillips 66 sustains its focus on a supply chain network. For this purpose, the company has invested heavily in transportation and logistics assets. The focus enables the company to procure crude from sources round the globe.
Moreover, Phillips 66 through its extensive infrastructural network manages 15,000 miles of crude oil, petroleum product and NGL pipeline, 42 finished product terminals, eight liquefied petroleum gas terminals, five crude oil terminals, and one coke exporting facility.
Phillips 66’s performance is dependant upon sourcing crude oil from suppliers round the globe. Steady supply is mandatory for the company to maintain its production volume. Any geo-political disturbance round the globe can render its refineries idle and hamper the top line of the company.
As such the profitability of the company depends upon the spread among the margins of refined product prices and crude oil feedstock prices. However, the spread is dependant upon a host of macro factors which are outside the domain of the company’s control.
However, due to the volatile nature of the refining business, we do not see any significant price upside for Phillips 66 shares over the next few quarters.
While we expect Phillips 66 to perform in line with its peers, one can consider sector stocks like Delek Logistics Partners LP (DKL), Spectra Energy Partners LP (SEP) and Sunoco Logistics Partners LP (SXL) as buying opportunities for the short term.
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