Image: Phillips 66’s shares have been quite volatile as refining margins ebb and flow, but shares are up nicely since the start of 2021 even as they’ve given up some ground so far in 2023.
By Brian Nelson, CFA
The refining business isn’t an easy one.
Not only are refiners exposed to potentially higher feedstock costs but prices at the pump could further squeeze refining margins at times. What we like about Phillips 66 (PSX) is that it generally has advantaged feedstock resources, and it is extremely shareholder friendly. The company recently raised its dividend to $1.05 per common share on a quarterly basis and expects to return $10-$12 billion in shareholder distributions between July of last year and year-end 2024.
During its first-quarter 2023, results released May 3, the company generated $2.0 billion in adjusted earnings, or $4.21 per share, which handily beat the consensus estimate. Operating cash flow came in at ~$1.2 billion, while capital expenditures and investments totaled ~$378 million. Excluding changes in working capital, cash flow from operations came in at a very healthy ~$2.5 billion in the period. Our fair value estimate of $105 per share remains unchanged at this time.
Image: Phillips 66 continues to benefit from a relatively benign refining market.
Phillips 66’s business is dominated by its Refining operations, which continue to perform well thanks to better refining margin spreads ($20.72 per barrel in the first quarter of 2023 versus $19.73 in the fourth quarter of 2022), while the company’s Midstream division benefited from recent DCP Midstream integration efforts. Its DCP Midstream acquisition is expected to close in the current quarter, and management expects it “to generate an incremental $1 billion in annual adjusted EBITDA.” All told, the executive suite expects to “capture over $300 million of commercial and operating synergies” as a result of the deal. Phillips 66 is expected to carve out considerably savings in its Refining business over time, too, and we continue to monitor performance in its Chemicals division, which reflects its equity investment in Chevron Phillips Chemical Company LLC (CPChem).
Phillips 66’s dividend yield stands at a very attractive 4.4% at the time of its writing, and management remains committed to continuing to raise the dividend payout, having done so as recently as its most recently reported first quarter of 2023. Refining margins will continue to be volatile as feedstock costs fluctuate and prices at the pump vary, and while Phillips 66 retains a rather large total debt load, we think the operational and financial risks are acceptable for this income generator. When it comes to equities that pay above-average dividend yields like Phillips 66, there are almost always meaningful risks to the story, but we continue to like PSX shares as one of our favorite ideas in a well-diversified equity income portfolio. Its Dividend Cushion ratio remains unchanged at 1.9.
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Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, BITO, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson’s household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the securities written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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