Every time I think I’ve nailed every single stock in a sector, one always slips through my fingers. I actually see this as a good thing, because it probably means it’s underfollowed by analysts or the financial media. That may suggest it’s a value play, and I love value plays.
Except in this case, it turns out that Phillips 66 (NYSE:PSX) is just a spin-off from ConocoPhillips (NYSE:COP). Still, value play hope springs eternal. Let’s see how it stacks up against Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and BP (NYSE:BP).
The spin-off contains what’s known as “downstream assets” — refining, marketing, midstream and chemical businesses. Phillips 66 also gets the 10,000 gas stations. There’s a great visualization of what’s in the two companies here. You’ll find about 15 refineries in there, chugging out over 2 million barrels a day. Phillips 66 also got a nice bit of diversification with a 50% ownership in a natural gas processor, a 25% ownership in a natural gas pipeline and a nifty 50% ownership in a maker of petroleum-based products (fancy-named things like olefins and aromatics — and no, they don’t smell good).
Now, I regard oil exploration and production as Forever Hold stocks. That’s because, despite the shrill call by eco-folks for alternative energy, fossil fuel will always be more efficient and always provide better long-term value.
It’s difficult to get a solid handle on Phillips because the spin off is so recent, but let’s look at the most recent earnings report. Sales and other operating revenues have struggled in 2012, down about 10%. Fortunately, costs have fallen about the same.
The bottom line is that the company isn’t expected to hit the same $4.78 billion in net income for all of 2012, but it’ll come close. EPS is important helping to ascertain relative value, but for the sake of financial strength, I look at free cash flow and debt.
Phillips had $4 billion of FCF in 2011 and is on track for $2.5 billion to $3 billion in 2012. Debt expense is negligible, so it’s in fine shape. Analysts, however, are projecting only 5% growth long term. It also pays a 1.9% dividend.
Then again, all the energy producers are flopping around a bit, so let’s see how it stacks up against the three big boys mentioned above.
Exxon’s EPS will be down year-over-year for 2012. Its five-year growth estimate is only 3%, and XOM pays a 2.6% yield. I love that it’s sitting on $50 billion in cash and long-term investments against only $8 billion in debt. It’s also tough to argue with $20 billion in FCF.
Chevron may put out “only” $7 billion in FCF, but its growth rate appears to be flat over the long term, according to analysts. Its $40 billion in cash and $10 billion in debt is nothing to sneeze at, nor is its 3.3% yield.
And of course, you have the riskier play with BP because of its Deepwater Horizon liabilities. Plus, BP’s 2% long-term growth, $54 billion in cash offset by $38 billion in debt and $5 billion in FCF don’t give me the degree of comfort I need here, even with a 4.9% dividend.
When I compare all of these, I’d say that if you want to risk BP as a potential value play, it has the largest possible upside with the greatest risk. There’s nothing wrong with any of the other companies, but I’d choose Exxon over Phillips at this point.
As of this writing, Lawrence Meyers didn’t own securities mentioned here.