Recently spun-off refiner Phillips 66 (PSX) reported strong second quarter earnings Wednesday. Earnings grew 39% year-over-year to $2.23 per share, which was also $0.48 higher than consensus estimates. The firm also announced that the board has authorized a $1 billion stock buyback. Shares were a standout performer in our Dividend Growth Newsletter portfolio during the month of July.
Refining and marketing, often a volatile segment, saw earnings grow 53% compared to the second quarter last year. Company-wide refining capacity utilization for crude was 93%, and the company has successfully lowered its cost structure to achieve higher levels of profitability. The marketing arm of the segment also experienced stronger margins due to a steeper decline in spot prices than product prices.
Natural gas prices continue to weigh on profitability in the midstream business, as earnings, net of a $170 million noncash impairment charge, fell 29% to $79 million. This comes as no surprise, as natural gas liquids prices fell 38% year-over-year. We suspect midstream earnings will struggle as long as natural gas prices remain depressed.
However, the fall in natural gas prices helped improve profitability in the chemicals business. Second quarter adjusted earnings in the segment increased 27% to $242 million. Lower crude prices led to lower costs for propane and stronger margins for Olefins and Polyolefins. Lower natural gas prices led to reduced utility costs, which in turn, improved operating margins.
Thanks to a strong quarter from its refining and marketing segment, Phillips 66 was able to generate $1.4 billion in operating cash flow, and it also received $234 million from asset divestitures. We were initially worried about the firm’s highly leveraged balance sheet; however, the current favorable time in the refinery cycle should prevent any near-term liquidity issues.
All things considered, we’re impressed by the company’s performance thus far. However, the firm’s annual dividend yield at current levels is just 2.1%, which doesn’t necessarily get us excited as dividend growth investors. In this light, we prefer ConocoPhillips (click ticker for report: COP) and Chevron (click ticker for report: CVX) as dividend growth investments in the oil space, but we do think Phillips 66 has a nice total return profile.