Is phillips 66 a buy — the motley fool electricity for refrigeration heating and air conditioning answer key


Phillips 66 was the midstream (transportation and storage) and downstream (refining and marketing) arms of oil and gas giant ConocoPhillips, which spun the company off in 2012. The company’s midstream operations include income from its master limited partnerships Phillips 66 Partners ( NYSE:PSXP) and DCP Midstream ( NYSE:DCP), which it co-owns with Enbridge.

The company has numerous business units. How well each performs depends a lot on what’s happening in the energy markets. Usually, Phillips 66’s refining arm is the most lucrative, but in 2016, it was the company’s marketing unit, and in the most recently completed Q1 2018, it was midstream by a nose over chemicals. Suffice it to say that Phillips 66 has a very diversified business model that should be able to absorb temporary weakness in any one part of the portfolio, like in Q1 when adjusted net income from refining dropped by 75.1% sequentially, but the company’s overall earnings still beat analysts’ expectations.

Phillips 66 is also growing fast. Net income rose from $1.6 billion in 2016 to $5.2 billion in 2017. True, that was partly a result of corporate tax changes. But even if we strip out the corporate line, net income rose by 44.7%. Here’s what’s fueling — no pun intended — that growth. The growth story

With oil prices now above $70/barrel — and Brent crude prices are even creeping up on $75/barrel — oil production has become more lucrative. That doesn’t directly affect Phillips 66, which isn’t an oil producer, but it does increase demand for its midstream services as higher oil production volumes require more transportation and storage.

Phillips 66 Partners has been capitalizing on this trend in Q1, reporting higher volumes in its joint ventures, as well as beating consensus expectations for revenue and earnings. In Q4 2017, the partnership increased earnings by 60%, thanks to the completion of its largest acquisition to date, and in Q1 it announced the Gray Oak Pipeline project, its largest organic growth project to date, which will expand the company’s footprint in the red-hot Permian Basin.

As for the parent company, refining income was much lower in Q1 due to several refinery turnarounds — when a refinery is taken completely offline for major revamping. But even with those turnarounds occurring, Phillips 66 still managed to generate $488 million in operating cash flow and return $3.8 billion to shareholders through dividends and share repurchases. Now that those turnarounds are in the rearview mirror, the company should benefit directly from the increased refinery capacity and throughput, and indirectly through the extra volumes it can move through its pipelines to its refineries.

While Phillips 66’s P/E metrics are in line with these three peer companies, its EV-to-EBITDA ratio, which strips out depreciation, is higher than these three peers on both a trailing and forward basis, suggesting that it might not be that much of a bargain by comparison.

Warren Buffett likes to buy wonderful companies at great prices, and he certainly seems to have gotten his money’s worth with Phillips 66. But it’s possible that the value ship may have sailed on this investment. While it seems likely that the company’s midstream segment will continue to outperform in the short term as long as oil prices stay high, sustained high oil prices may cause problems for the company’s refining segment. While the company has a fair shot at medium-term outperformance as its various projects come online, the energy markets may not cooperate, so it’s not a slam dunk investment anymore.

That said, I wouldn’t go so far as to call it a bad investment; investors will probably be just fine if they buy in now. But as with much of the oil and gas space at present, the real bargains are getting tougher and tougher to find as energy prices rise ever higher.