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On Apr 2, Zacks Investment Research downgraded largest U.S. refining company Phillips 66 (PSX - Analyst Report) to a Zacks Rank #3 (Hold).

Why the Downgrade?

Houston, TX based Phillips 66 is an independent publicly traded company, was formed after the spin-off of the refining/sales business of ConocoPhillips (COP - Analyst Report) in May 2012. The move resulted in the creation of the largest refining company in the U.S. and the biggest exploration and production player based on oil and gas reserves.

In addition to the refining, marketing and transportation businesses, the company has emerged as an integrated downstream company with most of the Midstream and Chemicals segments, as well as power generation and certain technology operations included in the Emerging Businesses segment.

Being a buyer of crude, the company’s profitability might be affected by the increase in oil prices. As a result, with the commodity’s price hovering around $100 per barrel, we expect Phillips 66’s margins to be negatively impacted due to a rise in the cost of crude.   
 
Phillips 66, one the largest independent oil refiners in the U.S., has easy access to the West Texas Intermediate (WTI) crude. WTI is light and of very high quality. As the major portion of the company’s refining capacity uses light/sweet crude oil as feedstock, the company is unable to take advantage of the attractive crude quality spreads, which is the price differential between the low-cost heavy/sour and the higher-priced light/sweet grades of crude oil.
 
Over the past one month, the company has seen a negative trend in earnings estimate revision. For the first quarter of 2014, two estimates moved down in the past 30 days, with no upward revision. For the full year, two estimates moved down while only one estimate was revised upward.

Stocks That Warrant a Look

While we expect Phillips 66  to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at Unit Corporation (UNT - Snapshot Report) and World Point Terminals, LP (WPT - Snapshot Report) as good buying opportunities. These oil and gas players – sporting a Zacks Rank #1 (Strong Buy) – have solid secular growth stories with the potential to rise significantly from current levels.

 

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