Phillips 66

Oil & Gas

Phillips 66 reported massive profits thanks to tight refining capacity, allowing the company to increase its dividends

Phillips 66 told analysts that even as new refinery capacity was increasing, a large portion was still being taking offline, supporting higher margins. “Jeff Dietert — Vice President, Investor Relations: Yeah. Doug, we have between 1.3 million and 1.5 million barrels a day of capacity growth per year in the ’22, ’23, ’24 time frame. Now that will be offset by about half as much capacity that’s announced rationalizations that will be coming out of the market, including our Rodeo Renewed that we’re converting to a renewable diesel facility. So there will be some capacity growth, but the market’s tight, as you know, from the cracks in the marketplace and the inventories today currently.”

Phillips 66 said that supply constraints were “supporting elevated refining margins,” leading to earnings over $3 billion.“Mark Lashier — President and Chief Operating Officer: We’re focused on reliably providing critical energy products, including transportation fuels to meet demand. We’ve maintained strong operations in successfully completing our spring turnaround activities early in the second quarter. Even with global refineries running near max capacities, gasoline and distillate inventories remain low, supporting elevated refining margins. In the second quarter, we had adjusted earnings of $3.3 billion or $6.77 per share.”

A Phillips 66 executive said their refining income was $3.1 billion, “up from $140 million in the first quarter” and “Realized margins increased by 168% to $28.31 per barrel.” “Kevin Mitchell — Executive Vice President and Chief Financial Officer: The $11 million improvement in Other mainly reflects lower employee-related expenses and higher capitalized interest related to growth projects. During the second quarter, we received $216 million in cash distributions from CPChem. Turning to refining on Slide 8. refining’s second quarter adjusted pre-tax income was $3.1 billion, up from $140 million in the first quarter. The improvement was primarily due to higher realized margins across all regions. Realized margins increased by 168% to $28.31 per barrel. Pretax turnaround costs were $223 million, up from $102 million in the prior quarter. Crude utilization was 90% in the second quarter and clean product yield was 83%. (Phillips 66 (PSX) Q2 2022 Earnings Call, 7/29/2022)Phillips 66 increased their dividend by 5%, over 11 times from its inception in 2012.“Mark Lashier — President and Chief Operating Officer: In May, we raised our dividend 5% to $0.97 per share. We’ve increased the dividend 11x since our inception in 2012, resulting in an 18% compound annual growth rate. Our strategy remains consistent, supported by a strong foundation of operating excellence and a high-performing organization. We’re focused on strategic return-enhancing growth investments in midstream, chemicals and emerging energy while selectively investing to increase returns in refining and marketing and specialties.” (Phillips 66 (PSX) Q2 2022 Earnings Call, 7/29/2022)

Phillips 66’s CEO cited their “capital discipline,” saying any cash should go to their shareholders 

Phillips 66’s CEO touted their “commitment to capital discipline… As cash flow improves further, we’ll prioritize shareholder returns and debt repayment.”“Greg Garland — Chairman and Chief Executive Officer: The 2022 capital program of $1.9 billion reflects our commitment to capital discipline. Approximately 45% of our growth capital this year will support lower carbon opportunities, including Rodeo Renewed. As cash flow improves further, we’ll prioritize shareholder returns and debt repayment. In October, we increased the quarterly dividend to $0.92 per share. We remain committed to a secure, competitive, and growing dividend. We’d like to resume share repurchases this year and on our path toward getting back to pre-COVID debt levels over the next couple of years. We’re taking steps to position Phillips 66 for the long-term competitiveness. Across our businesses, we’re assessing opportunities for permanent cost reductions. (Phillips 66 Q4 2021 Earnings Call, 1/28/2022)

Phillips 66’s CEO said the company was planning to “be very constrained on capital” so it could focus on shareholder returns. “Greg Garland — Chairman and Chief Executive Officer: And so I would say that we’re probably on the upside of that. So given 6 to 7 billion of cash flow, our first dollar is always going to go to sustaining capital, that’s $1 billion. Dividend is 1.6 billion, and then that leaves room for us. We can signal that the capital budget is going to be 2 billion or less, so we’re 1.9 billion for this year. That’s a deliberate signaling that for this year or next year, we’re going to be very constrained on capital. That frees us up to pursue some debt repayment and get back to share repurchases while doing a little bit of growth. And so I think we make that all balance as we think about that. (Phillips 66 Q4 2021 Earnings Call, 1/28/2022)

Phillips 66 CEO: “I want to get back to share repurchases. I mean, we’ve been out of share repurchases, and it’s time to step back into those.” “Greg Garland — Chairman and Chief Executive Officer: OK. Paul, I think you’re up to five questions now, but I’ll try my best to start. At least I’ll answer the ones I want to, how about that? So first of all, we — I mean, historically, we’ve used 1.5 billion to 2.5 billion is growth capex. So I think that for many reasons, pandemic, one of them, the need to be structured around debt repayment and get back to share repurchases, we purposely signaled total capex budgets of 2 billion or less for this year and kind of next year. We’ll see what happens going forward. But I do think we want to get the balance sheet back to something over the next two years, approaching pre-COVID, so call it, 12 billion. I want to get back to share repurchases. I mean, we’ve been out of share repurchases, and it’s time to step back into those. And so I think for all the right reasons, we want to keep capital constrained across the portfolio over the next couple of years (Phillips 66 Q4 2021 Earnings Call, 1/28/2022)

Phillips 66 CEO: “the whole idea is to free up more cash for debt repayment and getting back into share repurchases.” “Greg Garland — Chairman and Chief Executive Officer: So there are certainly lots of growth still around the portfolio, allows us to be very structured about how we think about capital allocation. But to your point, the whole idea is to free up more cash for debt repayment and getting back into share repurchases. Kevin, if you want to take DCP, I’ll let you take it.” (Phillips 66 Q4 2021 Earnings Call, 1/28/2022)

A Phillips executive suggested as much as 4.5 million barrels per day of refinery capacity has been cut 

A Phillips 66 executive said “we’ve seen a total of about 4.5 million barrels a day of refining rationalization… When you look at last year, it was the first year in at least 30 years where there was more capacity rationalized out of the global fleet than there was capacity added. And so we are seeing that benefit.” “Jeff Dietert — Vice President, Investor Relations: Yes, Doug, I think we’ve seen a total of about 4.5 million barrels a day of refining rationalization that’s been announced and much of that has already occurred. When you look at last year, it was the first year in at least 30 years where there was more capacity rationalized out of the global fleet than there was capacity added. And so we are seeing that benefit. As we look forward, there’s still pressure with higher natural gas prices in Europe on that — those units’ profitability. So we see that continuing to occur. We’ve also seen COVID delays, challenges getting labor in to execute new capacity additions so they’re getting spread out. We’ve seen a reduction of capital spending and concerns over energy transition. So it’s definitely impacting the supply side of the equation. (Phillips 66 Q4 2021 Earnings Call, 1/28/2022)