Follow the Route to Phillips 66
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Before ConocoPhillips (NYSE: COP) spun off Phillips 66 (NYSE: PSX) earlier this year it was the third largest integrated energy company in the United States. According to Barron's, institutional investors have pressured integrated energy companies to split off their refining operations from their exploration and development units because they are fond of pure plays. Phillips 66 is a pure play worth being fond of.
Phillips earns 25% of its profit from its chemical division, 13% from its midstream operations, 6% from its international refining and 56% from its U.S. refining. That 25% of its earnings derived from its chemical business generates 30% returns, compared to about 15% for its refining operations. In that Barron's article, energy analyst Doug Terreson said, “Phillips' petrochemical business will benefit in a disproportionate way from the growth in the production of natural-gas and natural gas liquids.”
What does that mean? It has an advantage because 80% of its capacity is in the U.S. and its main feedstock, ethane, is in oversupply. It sells to a world market in which competitors use a higher-priced, lower-quality product.
In a previous blog I covered how some refineries profit from being able to process “dirty oil” (a cheaper crude) and sell it at a higher margin based on WTI and or Brent prices. Phillips 66 is also a refinery, which has upgraded facilities to refine this grade of oil. They run 11 U.S. refineries supplying over 8,000 outlets. They have a U.S. capacity of refining 1.8 million barrels of crude a day.
Last week Phillips CEO Greg Garland told the Financial Times they plan on purchasing 2,000 rail cars at a price of about $200 million. This will enable them to carry up to 120,000 barrels of less expensive crude to its refineries on both the East and West coast being better able to compete with central U.S. refineries who have had a price advantage. Moving oil by rail is more costly than using a pipeline. Phillips thinks no pipeline will be built from the North Dakota oil fields in the near future to its refineries in California, Washington and New Jersey, which would lock them into the more expensive crude. This will also enable them to be flexible to take advantage when new sources of crude such as in Colorado become available. It allows them to scale up or down a virtual pipeline on wheels.
Mr. Garland announced at a conference in May they will begin a .20 cent dividend payout in the third quarter of this year. One always looks for good management when investing in a company and it appears the forward thinking CEO is that. Phillips 66 sounds like a pure play one can be fond of.
mwm102 owns shares of Phillips 66. The Motley Fool has no positions in the stocks mentioned above. 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.