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Phillips 66 Shares Fall on Spectrum Corp. Buyout Plan

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Independent refiner, Phillips 66’s (PSX - Free Report) share price dropped 1.6% to $84.94 on Jun 24, 2014 from the previous day’s closing price. This can be traced back to the proposed acquisition of Spectrum Corp., a Memphis, TN-based specialty lubricants company, which Phillips 66 announced on Monday.  

Spectrum is an independent blender, packager and marketer of specialty lubricants including two-cycle engine oil, small engine oil and hydraulic oil. Spectrum offers a broad array of private-label and brand-name specialty lubricants and related products, including more than 500 products under 14 separate product lines. Spectrum is currently owned by privately owned Dominus Capital, L.P. The transaction is expected to close in the third quarter of 2014 following the receipt of regulatory approvals.

Houston, TX based Phillips 66 is an independent publicly traded company, formed after the spin-off of the refining/sales business of ConocoPhillips (COP - Free 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 $106 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.

Both Phillips 66 and ConocoPhillips currently carry a Zacks Rank #3 (Hold). Some better-ranked stocks in the oil and gas sector include Encana Corp (ECA - Free Report) and Matrix Service Company (MTRX - Free Report) , both sporting a Zacks Rank #1 (Strong Buy).


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