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Phillips 66 (PSX) Is Even More Attractive After Price Decline

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Lower gasoline and distillate margins have impacted on the financial results of U.S. refiners in the first quarter of 2016 and caused their shares to drop significantly.

Phillips 66 (NYSE:PSX) is one of Warren Buffett’s 20 highest dividend stocks (7th highest). Price declines create opportunities for patient investors.

In fact, all the five U.S. leading refining companies’ shares have shown a decline in the last four weeks between -6.1% for Valero Energy Corporation (NYSE:VLO) and -20.2% for HollyFrontier Corp (NYSE:HFC).

Moreover, all the five companies have recorded a negative return (including dividends) in the last 52 weeks.

Phillips 66 (PSX) has shown the best performance among the leading refining companies with a negative return of -0.5% while HFC’s negative return has been very high at -34%, as shown in the table below.

PSX Price Declines

Phillips 66’s diversified business model includes refining, midstream, chemicals, and marketing and specialty operations. As such, the company’s cash flow is less volatile than that of pure-play refiners.

On April 29, Phillips 66 reported its first quarter 2016 financial results which missed earnings-per-share expectations by $0.20 (23%). Quarterly revenues of $17.8 billion came above the consensus estimate of $16.9 billion. Phillips missed earnings-per-share estimates in the recent quarter after beating expectations in its previous six quarters, as shown in the table below.

PSX Earnings Surprises

Source: Yahoo Finance

The company reported first-quarter earnings of $385 million, compared with $650 million in the fourth quarter of 2015. Adjusted earnings were $360 million, a decrease of $350 million from the last quarter.

PSX First Quarter Highlights

– Midstream, Chemicals and Refining negatively impacted by market and seasonality

– Marketing and Specialties generated solid first-quarter earnings

– Refining utilization at 94 percent; Chemicals global O&P utilization at 93 percent

– $687 million of capital returned to shareholders through dividends and share repurchases

– $446 million invested in Midstream, primarily growth projects

In the report, Greg Garland, Chairman and CEO, said:

“Weaker margins impacted our financial results in the first quarter. Our businesses ran well, and we remain focused on operating excellence with industry-leading safety performance. During the quarter, we successfully completed planned turnarounds and accelerated some maintenance activities in the low margin environment. We are committed to maintaining our strong balance sheet and a disciplined approach to capital allocation. During the quarter we reinvested $750 million in the business and distributed $687 million to shareholders.”

The chart below shows the earnings of the company’s main segments in the last five quarters. The refining segment which had been the main contributor to the PSX’s income earned only $86 million in the first quarter of 2016, compared to $538 million in the first quarter of 2015.

PSX Earnings

Source: company’s reports

In the third quarter of 2015, the refining segment earnings were as high as $1,003 million, largely driven by improved realized gasoline and secondary product margins, as well as higher volumes.

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