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Will Phillips 66 (PSX) Disappoint This Earnings Season?

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Leading refining player Phillips 66 (PSX - Free Report) is expected to report second-quarter 2017 earnings on Aug 1, before market opens.

The company’s earnings surprise history is impressive. Phillips66, which was spun off from ConocoPhillips (COP) on May 1, 2012, beat the Zacks Consensus Estimate in three of the trailing four quarters, with an average positive earnings surprise of 432.25%. Let’s see how things are shaping up for this announcement.    
 

Phillips 66 Price and EPS Surprise

 

Phillips 66 Price and EPS Surprise | Phillips 66 Quote

Factors Likely to Influence Earnings

The company’s free cash flow has been negative over the last two years, reflecting weak business operations. Hence, its ability to pay dividends is at risk. Since the beginning of 2012, there has been exponential growth in long-term debt, reflecting Phillips 66’s weak balance sheet.

However, it is to be noted that the company’s prospects are negatively correlated with oil prices. This is because refiners buy raw crude to produce refined products like gasoline. Oil and gas prices have been low for almost three years now and during second-quarter 2017, the prices of both commodities deteriorated further. The prolonged weakness can be attributed to the supply glut in the commodity market. During the quarter under review, oil and natural gas prices fell 8.4% and 5%, respectively. Therefore, this was favorable for the refiners as decrease in crude price translates to lower input cost. This is likely to be reflected in the company’s second-quarter profitability.

Q2 Stock Price Performance

Pricing chart for the first three months of this year reveals that Phillips 66’s shares underperformed the industry. During the aforesaid period, the company’s shares gained 5.2% as against 8.2% increase for the broader industry.

Earnings Whispers

Our proven model does not conclusively show that Phillips 66 will beat estimates this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is -3.81%. This is because the Most Accurate estimate is at $1.01 and the Zacks Consensus Estimate is pegged at $1.05. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Phillips 66 carries a Zacks Rank #4 (Sell). Please note that the Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.  

Other Stocks to Consider

Although, earnings beat looks uncertain for Phillips 66, here are some firms that you may want to consider on the basis of our model. These have the right combination of elements to post an earnings beat this quarter:

TransCanada Corporation (TRP - Free Report) has an Earnings ESP of +7.84% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here

Boardwalk Pipeline Partners LP (BWP - Free Report) has an Earnings ESP of +6.90% and carries a Zacks Rank #2.

The Williams Companies Inc (WMB - Free Report) has an Earnings ESP of +50.00% and carries a Zacks Rank #3.

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