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Phillips 66 Cuts 2020 Capex, Halts Share Buybacks, Up 8.3%

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Phillips 66 (PSX - Free Report) recently announced plans to reduce capital expenditure by $700 million (around 18%) to $3.1 billion, in order to navigate through the current tough business environment. The stock jumped 8.3% yesterday, following the news.


In the refining business, the company intends to defer and cancel some discretionary projects as the demand for refined products is expected to go down due to the social distancing mandate. The company’s head of commercial operations, Brian Mandell estimates 20% demand destruction in the United States, while the same in the West Coast region is expected to be 30%, primarily due to longer isolation periods.

In response to these conditions, the company has reduced its planned refining budget from the previous guidance of $1,035 million to $835 million. Of the total budget, $485 million will be directed toward sustaining business while $350 million will be used for growth purposes. It has reportedly curbed production to minimum rates in 13 refineries. First-quarter refinery utilization rates are now expected in the 80-85% range, down from initial expectation of 90%. Markedly, refinery turnaround activities are also being deferred due to contagion risks.


The company will likely delay several midstream projects as crude production dries up due to the current low price environment. Several upstream companies like Pioneer Natural Resources Company PXD and Apache Corporation APA have reduced their planned capital spending for the year due to low oil prices. As such, Phillips 66 has put its Red Oak Pipeline and Sweeny Frac 4 projects in the list of deferrals. It now expects total 2020 spending of $958 million in midstream activities, down from the previous estimate of $1,425 million. Notably, $821 million of the total will be directed toward growth purposes.

The company’s subsidiary, Phillips 66 Partners LP (PSXP - Free Report) has deferred its Liberty Pipeline and delayed the final investment decision for the ACE Pipeline. From the previous estimate of $962 million, the partnership’s spending estimation now stands at $932 million, of which $800 million will be used for growth purposes.

Other Details

Phillips 66 now expects operating and administrative expenses to decline by $500 million for 2020. Notably, the company has paused the share buyback program from Mar 18 and expects to resume it later. In the first quarter, the company has already bought back $440 million worth of shares. Markedly, Phillips 66 — which already had $5 billion under the revolving credit facility — secured a new $1-billion loan in order to boost financial flexibility. This is expected to provide the company some relief during a period of uncertainty.

Year-to-Date Price Performance

The Zacks #3 (Hold) company has lost 59% year to date compared with 65.5% decline of the industry it belongs to. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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