When former integrated giant ConocoPhillips (COP) first spun off its refiner arm as Phillips 66 (PSX), the world was a vastly different place. The basic idea was that the slower and erratic profits produced by refining petroleum was hurting overall earnings for COP stock. Conoco was essentially being dragged down by PSX.
Once free of PSX stock and its refining units, COP would be able to trade at a much higher multiple. Meanwhile, Phillips 66 would be a plodding dinosaur churning out dividend income and slow share price growth.
Well, it seems like the joke is on COP stock.
Phillips 66 has turned out to be quite an exciting growth element for its shareholders. Perhaps more importantly, recent moves by the refining firm have only strengthened the appeal of owning PSX stock. For investors, turning their attention towards the transitioning “plodding” refiner could be one of the best long-term bets for their portfolios.
PSX Stock — An All-around Logistics Play
When COP spun-off Phillips 66 back in 2012, no one would have guessed that shares of PSX stock would have returned about 117% since its IPO. That performance managed to beat both the S&P 500 and PSX’s former parent in the returns category. But, there could be even more in store for refining stock.
That’s because PSX isn’t really just a “Plain-Jane” refining company anymore.
The firm has undergone a mass transformation into a more of a complete energy logistics and processing firm rather than being a straight petroleum refiner like rivals Western Refining (WNR) and HollyFrontier (HFC). The key is that more than 40% of PSX stock earnings come from non-standard refining businesses — namely chemicals processing and pipelines/storage.
And recent decisions by PSX will help those businesses grow by leaps and bounds.
Nearly 70% of Phillips 66’s recent capex spending budget of $4.6 billion will be plowed back into both its chemicals and logistics segments. This includes a brand new liquefied petroleum gas (LPG) terminal as well as a new fractionator facility. That facility will “crack” natural gas liquids (NGLs) — like ethane — for end use by petrochemical companies.
Those petrochemical firms include PSX’s own joint ventured with Chevron (CVX) plants. That means PSX can take advantage of its own cheap ethane production in order to make base chemicals for plastics, paints and other end-users.
And considering that both NGL midstream and these chemical processes already have higher margins than traditional gasoline and diesel refining, PSX is setting itself up for some sweet profits down the line.