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Here's Why You Should Hold on to Phillips 66 (PSX) Stock Now

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Phillips 66 (PSX - Free Report) is well poised to grow on the back of robust midstream infrastructure demand and solid prospects in the marine fuels market.

For second-quarter 2019, the company’s earnings per share projection increased from $2.28 to $2.36 in the past 60 days. The stock witnessed positive estimate revision from two firms in the said period. The company beat estimates in each of the trailing four quarters, with the average being 37%.

Phillips 66 Price and EPS Surprise

Phillips 66 Price and EPS Surprise

Phillips 66 price-eps-surprise | Phillips 66 Quote

Courtesy of solid prospects, this Zacks Rank #3 (Hold) stock is worth holding on to at the moment.

What’s Driving the Stock?

Phillips 66 is the leading player in each of its businesses like refining, chemicals, and midstream in terms of size, efficiency and strength. The company is on track to enhance its potential in every business segment by streamlining its portfolio of assets and investing in growth developments.

The midstream business is in high demand in the United States as there is a huge need for fresh pipeline and infrastructure properties in the flourishing shales owing to the existing bottleneck problems. To capitalize on the trend, the company allocated 45% of 2019 capital budget for profitable midstream operations, which will lead to high margin and strong growth.

The International Maritime Organization, through the IMO 2020, is planning to reduce the sulphur content in marine fuels, which will increase the demand for distillate fuels. Given updated refining assets, Phillips 66 is well positioned for the upcoming change in regulations.

Investors should note that the company is strongly committed in returning cash to its shareholders through dividend payments and repurchase of shares. Since inception, the company returned $23.2 billion to its shareholders and managed to hike quarterly dividend nine times.

Downsides

However, there are a few factors that are impeding the growth of the stock lately.

The company’s refining business is currently under pressure owing to unplanned downtimes and maintenance works. Declining crude utilization rate is a concern for the company as it can lead to underperformance in the future. Even the first quarter of 2019 was affected by lower crude utilization rate.

Uncertainties in the global market, owing to heated up trade disputes between the United States and China, are likely to dent demand for petrochemicals. This will significantly affect the company’s Chemicals segment. Notably, the segment witnessed lower margin during the March quarter of 2019. 

Phillips 66’s operating expenses jumped almost 10% and 4% through 2017 and 2018, respectively. The trend continued in first-quarter 2019, wherein operating costs increased around 5% year over year to $1,307 million. The company’s bottom line will be hurt if the situation persists.

To Sum Up

Despite riding on significant growth prospects, increasing operating cost and impending weak petrochemicals’ demand are concerns for the company. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.

Key Picks

Some better-ranked players in the energy space are RGC Resources Inc. (RGCO - Free Report) , Hess Corporation (HES - Free Report) and Holly Energy Partners, L.P. (HEP - Free Report) . All these companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  

RGC Resources’ earnings growth is projected at 11.6% through 2019.

Hess’ earnings are expected to soar more than 127% through 2019.

Holly Energy’ earnings growth is projected at 6.5% through 2019.

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