Early Thursday morning, refiner and chemical producer Phillips 66 (click ticker for report: ) announced its capital-spending intention for 2013, which includes $3.7 billion in capital investment—up 6% compared to 2012. The firm also announced ambitions to raise $400 million for a minority stake in a new master limited partnership (MLP) IPO, which it anticipates will include transportation assets like pipelines, rail cars, as well as NGL products for transportation. Phillips 66 described the MLP as an opportunity to capitalize on the “North American oil and gas revolution.”
MLPs tend to have favorable tax treatment for oil-transportation business models, and we think the new Phillips 66 MLP will be a unique play on one of the best-performing refiners. The MLP will be more leveraged to demand for oil transportation, which should remain strong – it will not bet on tight refinery capacity or Phillips 66’s petrochemicals business, for example. We believe the primary motive for the move is to ultimately raise capital to help fund Phillips 66’s infrastructure expansions, which should help the company deliver cheaper shale oil to its refining and marketing segment and inevitably allow it to capture more value across the supply chain. The IPO won’t take place until at least the second half of 2013, so we think the company will provide more details as new information materializes.
Phillips 66 added that some of the planned capital expenditures will go to boost refinery capacity in the Gulf and on the West Coast in order to export more oil. This could be a huge positive for the broader economy, in our view, and it could have a large multiplier effect. In addition to capital expenditures, the company announced its intentions to reduce debt by $2 billion in 2013. Following its spinoff from ConocoPhillips (click ticker for report: ), Phillips 66 was loaded with debt. However, the refining cycle remains strong, and we think the company should be able to generate ample amounts of free cash flow to help meet its new debt-reduction targets.
Overall, we think the news, while not earth-shattering, is another small positive for a company that has performed incredibly well since its inception. We continue to see modest valuation upside from current levels, and we hold Phillips 66 in the portfolio of our Dividend Growth Newsletter.