On Sep 28, 2016, we issued an updated research report on Texas-based Phillips 66 (PSX - Analyst Report) .
Phillips 66 has a remarkable, geographically diversified refinery base. The company’s 14 refineries enable it to participate in various market opportunities and provide an advantage over region-specific competitors. Further, most of Phillips 66’s refineries are integrated with transportation, marketing and commercial operations that provide crude supply flexibility. These refineries benefit from strong margins because of low feedstock costs courtesy of higher proportion of onshore crude sources, which offers a distinct cost advantage over seaborne crudes. Phillips 66 also owns or has interests in three refineries in Europe and one in Asia.
Banking on the aforesaid positives, the company has been able to pay attractive dividends since its spin-off from ConocoPhillips on May 2012. We expect the company to continue increasing dividend payouts in the long run.
Phillips 66 remains focused on improving its supply chain network. For this purpose, the company has invested heavily on transportation and logistics assets. As a result, the company is capable of procuring crude from sources round the globe.
Phillips 66 is expected to direct the majority of its capital expenditure toward Chemicals and Midstream businesses rather than the larger refining and marketing segment. These midstream and chemicals segments are believed to be higher margin and possess stronger growth prospects. The investment for midstream projects will mostly be in the central U.S., where the need for pipeline and other infrastructure is much higher in newer production areas. Investments for Chemicals are likely to be made mostly in the U.S., to gain from low natural gas prices and rising petrochemical demand.
However, Phillips 66’s performance is dependant upon sourcing crude oil from suppliers worldwide. A steady supply is mandatory for the company to maintain its production volume. Any geo-political disturbance round the globe can render its refineries idle and hamper the top line. As such, the profitability of the company depends upon the spread among the margins of refined product prices and crude oil feedstock prices. However, the spread is dependant upon a host of macro factors outside the domain of the company’s control.
Further, Phillips 66’s chemicals business operates in a highly volatile industry where sales prices are always fluctuating. The company’s profitability in such a sector is not always guaranteed
Moreover, low oil prices have resulted in declining production as a result of spending cuts by most of the oil majors. This in turn could slow midstream investments and growth outlook and adversely affect Phillips 66 operations.
Zacks Rank and Stocks to Consider
Phillips 66 currently carries a Zacks Rank #3 (Hold). Some better-ranked players from the energy sector include Enbridge Inc. (ENB - Snapshot Report) , NGL Energy Partners LP (NGL - Snapshot Report) and Evolution Petroleum Corp. (EPM - Snapshot Report) . All these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Enbridge posted a positive earnings surprise of 19.57% in the preceding quarter.
NGL Energy Partners has a mixed earnings surprise history. The partnership posted positive earnings surprise in two of the last four quarters. It reported a positive earnings surprise of 1480.0% in the preceding quarter.
In the last reported quarter, Evolution Petroleum Corp. delivered a positive earnings surprise of 350.00%. Coming to the earnings surprise history, the company beat estimates in two of the last four quarters.
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