There’s plenty to love about the refining sector. As oil prices have tanked, the downstream players have been able to feast on the lower feedstock costs, increase margins and boost profits and dividends to investors. All in all, the sector is one of the few places in energy industry that is really working right now.
But there are refiners and then there are refiners. Phillips 66 (PSX) fits into that latter camp.
Ever since being set free from former integrated energy firm ConocoPhillips (COP), Phillips 66 has quickly transformed itself into a refining and chemicals powerhouse that’s also one heck of a powerful portfolio play.
Perhaps, more importantly for today’s investors, PSX stock still has plenty of gas left in the tank to keep the profits, dividends and share price rising into the future.
The Phillips 66 Trio
Just like rivals Tesoro (TSO) and Valero (VLO), Phillips 66 has been able to make the most of falling crude oil prices. But PSX has been fortunate enough to squeeze more value out of it than its competition.
The key for Phillips 66 is that it operates some of the most state-of-the-art facilities in the country. Those refineries are located in the Gulf Coast and have been able to take full advantage of the oil glut. PSX has been able to turn the oversupply of West Texas Intermediate (and even cheaper Western Canadian Select and Mexican Mayan benchmarked oil) into a major windfall. Average margins per barrel for Gulf Coast refineries are running at over $12 per barrel. That’s the highest since 2010.
This helped PSX post its best quarter in nearly three years, and saw its profits jump 34%.
And while that sort of huge profit jump isn’t likely to be repeated, there’s still plenty of reasons why Phillips 66 will keep on humming in the New Year and beyond.
For starters, that glut of crude oil isn’t going away any time soon. Despite recent cuts to U.S. and Canadian drilling programs, crude oil supplies still remain robust. OPEC keeps on drilling and recent economic problems in China have curtailed demand for crude. “Lower for longer” continues to be the mantra for many energy stocks, and some analysts are calling for another year or two of pain in the energy sector. Phillips will continue to feast on the oversupply and profit.
Secondly, PSX isn’t just about refining crude oil into jet fuel, gasoline and heating oil. The firm is a petrochemical powerhouse as well. Phillips 66 has spent the last few years beefing up its presence in the Gulf Coast with regards to cracking natural gas into ethylene and other commodity chemicals. It’s also here where Phillips 66 has feasted on lower feedstocks as the glut of cheap American-made natural gas hasn’t subsided.
At the end of the day, these two “traditional” downstream businesses will continue to pump Phillips 66 full of cash flows for the foreseeable future. The growth for PSX is coming from not-so-traditional refining operations.
PSX is as much about energy logistics as it is about refining these days. Phillips 66 has plowed plenty of big dollars into expanding its midstream pipeline network and it still plans on expanding more.
Over the next three years, PSX is planning on investing $8 to $9 billion into new midstream projects to fuel growth. Longer term, it has identified about $20 billion in midstream projects. The bonus is that PSX will continue to drop-down these projects in its MLP Phillips 66 Partners (PSXP) and collect the IDRs and tax-deferred distribution from the various project’s cash flows.
Making a Big Play for Phillips 66
Given the potential positives for the longer term, investor’s may want to make a run at Phillips 66.
Even after its 20%-plus run-up this year, shares are still trading at an attractive price-earnings of 10 and a 2.6% dividend yield. While that’s not as cheap as some of its peers — previously mentioned VLO and TSO can be had for single digits — they don’t have the large midstream or chemicals operations that PSX has. The slight premium is certainly warranted given the extra profit potential and diversification they provide.
Over the longer term, the wide range of assets is going to help power growth. The combination of refining, petrochemicals and midstream infrastructure allows it grow under a variety of market conditions and outcomes.
Already, PSX has done that. Since its spin-off in 2012, we’ve seen a variety of refining markets — from today’s great margins to a near crash in 2013. Over that time, Phillips 66 has been a pretty stellar performer. PSX has seen continuously rising cash flows and has managed to increase its dividend by 41%.
And when it comes to the refiners, dividends and cash flows are what matter most. Phillips has certainly delivered on that front, and should continue to do so within today’s energy environment.
Investors can certainly do much worse than PSXP and PSX stock. There’s still time to snag the best long-term bargains in the energy sector today
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
