This Energy Spin Off Delivers
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Have you ever begrudging become a shareholder of a new firm? You’d spent years owning a diversified industry leader and then one day management decides that two are better than one. Now you’re stuck with shares of a company that you’d never planned on owning and now have to determine your next course of action. That’s describes the dilemma of ConocoPhillips (NYSE: COP) shareholders who recently were given shares of Phillips 66 (NYSE: PSX).
Unless you dumped your shares of one or both around the time of the separation, you’ve been given your first taste of the newly public Phillips 66. Now with their first earnings release you have your first real data point on the company. So how’d they do?
Actually, it’s quite good as the company generated $1.4 billion dollars of cash flow on the strength of their refining and marketing business as well as solid performance from their chemicals business. The only laggard was the midstream assets and they did spend a bit more in corporate but that’s to be expected as part of the spin off. They ended the quarter with $3.1 billion dollars in cash and $8 billion of debt giving the company a comfortable 30% debt to equity ratio. This has made management feel comfortable enough to authorize a $1 billion dollar share buyback plan to go along with their solid 2% dividend yield. If we break things down further, there is a lot to like in this report.
Their refining and marketing division had an excellent quarter with nearly $1.2 billion of adjusted earnings. This is nearly 60% higher than the year ago quarter thanks to exceptional realized refining margins, 93% capacity utilization and 84% clean product yield. Their returns on capital employed have gone from just 1% in 2009 up to 17% this year. Finally, they were able to close their sale of their Trainer refinery to Delta for $234 million of gross proceeds.
Their chemicals business which is a joint venture with Chevron (NYSE: CVX) called CP Chem had excellent adjusted earnings of $242 million on the strength of olefins and polyolefins. Last year the business generated $190 of adjusted earnings giving it growth of 27%. This is one of their highest return businesses, enjoying returns on capital employed of 30% this year and one that they’ll be investing heavily in over the next few years. They just began construction on the world’s largest on-purpose 1-hexene plant in Texas and are looking a building an ethane cracker and two polyethelye units in the Gulf Coast to take advantage of advantaged domestic supplies.
The only business unit that wasn’t exceptional was their midstream businesses. There were a couple of factors that affected the business; they took a $170 million noncash impairment of their investment in the Rockies Express Pipeline which they co-own with Kinder Morgan Energy Partners (NYSE: KMP) and Sempra Energy (NYSE: SRE). Both Sempra and Phillips 66 had their share of the pipeline up for sale but couldn’t find buyers while Kinder Morgan is rumored to be shopping their stake. The second factor was the fact that NGL prices were down 38% in the quarter affecting their DCP Midstream investment as that business has exposure to commodity prices. Adjusted earnings when you strip out the impairment were $79 million which is $32 million lower than the prior year which is completely attributable to their DCP interest. Like their chemicals business this is a high return business which will see a lot of investment over the next few years as it enjoys returns on capital employed of 30%. DCP has several projects in the pipeline that should be completed over the next year and lead to higher earnings.
I have to admit, I was skeptical of this spinoff when it was first announced but I like what I see from them so far. Refining has traditionally been a tough business driven largely by volatile energy prices but as cheaper domestically produced feedstock becomes available it could be a real driver for future returns. That same cheap feedstock should also benefit their chemicals business as they grow it here in the states. I’m planning to hold my Phillips 66 shares and am even thinking about adding to them as the company continues to perform.
latimerburned owns shares of Phillips 66 and ConocoPhillips. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.