On Jan 8, 2016, we issued an updated research report on Phillips 66 PSX, an energy manufacturing and logistics company with midstream, chemicals, refining as well as marketing and specialties businesses.
We are optimistic about Phillips 66’s geographically diversified refiner presence. The company’s 15 refineries enable it to participate in various market opportunities and provide it 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 crude. Phillips 66 also owns or has interests in three refineries in Europe and one in Asia.
Phillips 66 has a steadfast focus on its supply chain network. Hence, the company has invested heavily on transportation and logistics assets. This should enable the company to procure crude from sources round the globe.
Phillips 66 is expected to focus the majority of its capital expenditure on the Chemicals and Midstream businesses rather than the larger Refining and Marketing segment. These Midstream and Chemicals segments are believed to be higher margin and possess stronger growth prospects. The investment for midstream projects will mainly be made in the central U.S., where the need for pipeline and other infrastructure is much needed in newer production areas. Most of the investments for Chemicals will be made in the U.S. to gain from low natural gas prices and rising petrochemical demand.
Phillips 66 is viewed as an industry leader in each of its businesses – refining, chemicals and midstream – with respect to its size, competitive strength, profitability, efficiency and safety. Moreover, through strategic investments and divestments the company is expected to boost each segment’s position over time and improve the asset portfolio.
However, Phillips 66’s performance is dependent upon sourcing crude oil from suppliers worldwide. A steady supply is mandatory for the company to maintain its production volume. Therefore, any geo-political disturbance across the globe can render the company’s refineries idle and hamper its top line. 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 dependent upon a host of macro factors which are outside the domain of the company’s control.
Moreover, Phillips 66 is primarily a refiner and has to abide by myriads of federal regulations at various levels. Also, given its global presence, the company has to follow the guidelines of multiple governments.
Zacks Rank and Stocks to Consider
Phillips 66 holds a Zacks Rank #2 (Buy). Other favorably placed players from the energy sector include Enbridge Energy Management LLC EEQ, ReneSola Ltd. SOL and Boardwalk Pipeline Partners, LP BWP. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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