Phillips 66 Q4 Earnings Review – 2018 May be the Best It’s Going to Get


Lower oil prices were very good to Phillips 66 (NYSE: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”PSX” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) in 2018.

The company generated $7.5Bn of cashflow, up 100% from $3.6 billion in 2017. The company only spent $2.6 billion on capital expenditures leaving almost $5 billion for the dividend and a big share buyback.

The $5 billion of free cash flow represented a very attractive yield of 11%. Over the past five years the company has generated an average yield of 8%, still very good.

PSX generated the best return on capital in the entire energy industry in the fourth quarter, quite a feat.

PSX Total Distributions – Attractive Payout to Shareholders

Phillips 66 Total Distributions
Source: Phillips 66 Fourth Quarter 2018 Conference Call

For investors, Phillips 66 represents a mature, stable yield investment. Compared to a 10 year treasury note only yielding 2.6%, an 8% yield from PSX will make any investor’s portfolio happy.

PSX is making small incremental investments to increase cashflow, but overall this is a best in class energy company with a slow growth, but high yielding business model that should be a core holding for any investor who values cash distributions above all.

PSX has a strong balance sheet with excellent liquidity and is basically in the sweet spot of the oil cycle where earnings are going up and leverage, also called debt levels, are right where the company wants them.

Strong Balance Sheet

Phillips 66 Consolidated PSX Capital Structure
Source: PSX Feb 2019 Investor Update

Operational Update

The company knocked the lights out in the fourth quarter generating $4.87/sh of earnings, 76% higher than consensus was expecting.

This was largely due to oil prices that averaged $60/bbl in the fourth quarter, down 15% from an average of $70/bbl the previous quarter.

As a result refining earnings were up big from the third quarter as the company was able to capture a higher spread between the price of oil and the retail price they receive for their end products.

Oil is the raw material refiners use to create the products they sell and when oil prices fall, the refiner is slow to lower the retail price, leading to higher margins and cashflow.

PSX Adjusted Earnings Q4 2018 ($MM) – Difference Between Q3 and Q4 Earnings

Phillips 66 Adjusted Earnings Q4 2018
Source: Phillips 66 Fourth Quarter 2018 Conference Call

Will 2019 Be Another Great Year?

PSX is set up well going into 2019, with some solid new projects in the pipeline, a healthy balance sheet and operations that are among the most reliable in the peer group.

Management does have to navigate through a current rebound in oil prices and a lack of access to some cheaper priced heavy crude from Venezuela due to new US sanctions.

Inventory levels of gasoline are higher than usual which also is concerning and could lead to some demand weakness and lower gasoline margins later in 2019.

These headwinds could lead to lower cashflow in 2019, but management has proven themselves capable of operating successfully in all types of oil pricing environments.

The main risk facing PSX investors is a global recession in 2019. Economic data is still showing modest growth, however, trade tensions, social unrest and monetary tightening from the US and Europe are leaving the global economy on fragile footing this year.

PSX remains a name every yield-focused investor should own, but economic uncertainty demands a close watch on your portfolio,

Evan Veryard has a Bachelor's of Chemical Engineering from McGill University and a MaSc. of Chemical Engineering from RMC. He has over 6 years of research experience focusing on industrial materials. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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