Buy Into the PSX Stock Transformation

Phillips 66 isn't really just a traditional refiner, and that fact will power PSX stock higher

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Buy Into the PSX Stock Transformation

Overall, the top brass at PSX stock expects that these non-refining businesses will grow to nearly two-thirds of the firm’s value in about four years. The company’s chemicals capacity will increase by roughly 33% in that time. Taken as a whole, this will boost profitability at Phillips 66 by around 50%.

And it’s still getting sweeter for PSX stock. That’s because it’s starting to use its new master limited partnership (MLPs) subsidiary — Phillips 66 Partners LP (PSXP) — in an effective manner.

PSX stock has finally begun to “drop down” assets into PSXP and take advantage of the tax savings. PSXP has agreed to purchase a 680-mile refined products pipeline system as well as two refinery-grade propylene storage systems from Phillips 66 for around $700 million.

The deal is expected to instantly accreditive to PSXP’s cash flows, which will flow back to PSX stock in the form of tax advantaged distribution payments. Meanwhile, the cash payment will be plowed back into more logistics and chemicals projects that it will drop-down into PSXP.

Time To Buy PSX Stock

With Phillips 66 focusing more of its attention towards higher-margined chemicals and midstream assets, investors should treat PSX stock like one of those companies. And that means a higher multiple and stock gains ahead.

When looking at PSX versus chemically focused rivals, Phillips 66 is still quite cheap. PSX stock currently trades for a forward P/E of less than 10. Meanwhile, both Dow (DOW) and DuPont (DD) are in the 12 to 13 range. Yet, PSX’s chemical earnings and margins are increasing at much faster rate than both DOW and DD.

Based on similar metrics, PSX stock could be worth as much as $90 per share. That’s nearly a 20% gain from today’s selling price and doesn’t including PSX’s growing 2.2% dividend.

In the longer term, the situation is still rosy for Phillips 66 shareholders as the firm continues to plow more capex spending into chemicals/NGL processing capacity and drop-down assets in PSXP. These assets will ultimately cushion the volatility in traditional gasoline refining and provide plenty of growth/profits for shares.

While COP’s spin-off of PSX was originally done to free its former parent from the plodding refining sector, it looks like Phillips 66 is becoming a true portfolio growth engine. Investors should snag PSX stock now.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2014/02/psx-stock-cop-psxp/.

©2014 InvestorPlace Media, LLC

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