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Phillips 66 to Ride the US Shale Boom

Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The shale revolution occurring right now in the United States will produce a number of winners for investors, some of them rather surprising. One winner that many investors are unaware of is the chemicals and refining company Phillips 66 (NYSE: PSX), which was spun off last month from ConocoPhillips (NYSE: COP). 

Why Phillips 66? Because the shale boom and the resulting cheap, abundant natural gas and natural gas liquids has set off a renaissance in American industry. Part of that renaissance can be seen in the petrochemical sector, which is currently in the midst of a capital investment boom.  

The entire US petrochemicals industry stands at the dawn of what should be a long-term upturn in its fortunes. The shale boom has led to a surge in production of natural gas liquids (NGLs) such as ethane and propane. That has sent the price of NGLs tumbling. That has created a large cost advantage for US chemicals manufacturers that use these liquids as a feedstock when compared to rivals in Europe and Asia that use naphtha and other products derived from crude oil. 

An analyst for the research firm Wood Mackenzie, Larry Schwartz, said “We are going to see a large quantity of NGLs being produced in North America, and providing an economic advantage relative to the rest of the world. Phillips 66 CEO, Greg Garland, confirmed this by saying “After the Middle East, the United States is the next best place to make petrochemicals.” Mr. Garland explained that US chemicals manufacturers can buy ethane at about $5 per million BTUs, compared to roughly $18 per million BTUs for crude oil. 

Phillips will participate in this petrochemicals upturn through its 50/50 joint venture with Chevron (NYSE: CVX), Chevron Phillips Chemical. Phillips 66 said it's considering investing in a second large new petrochemical plant in the Gulf of Mexico region to benefit from the cheap feedstock unlocked by the shale revolution. The final decision on the plant may not be made for a few years since the company already committed to another $5 billion petrochemicals project in Baytown, Texas last year. A "cracker" plant will convert ethane into ethylene, a basic building block for plastics and products such as cosmetics and detergents. Other nearby plants will turn some of the ethylene into polyethylene, a plastic used in packaging. 

Of course, Chevron Phillips Chemical is not the only firm to make recent large investment decisions about expanding in the US. In April, Dow Chemical (NYSE: DOW) announced it was building a world-scale steam cracker in Freeport, Texas as part of a $4 billion US Gulf Coast expansion of its petrochemicals business. Also recently, international oil and chemicals giant Royal Dutch Shell PLC ADR (NYSE: RDS-A) announced it would build a multi-billion dollar cracker plant just north of Pittsburgh to take advantage of the Marcellus shale boom in western Pennsylvania. 

Other companies already announcing expansions or planning to soon include ExxonMobil, Ineos and LyondellBasell. The bottom line for investors is that the United States is the focus of the global chemical industry's investment, contributing to a wider revival in American industry. 

Again Mr. Garland of Phillips 66 summed up the situation nicely, “We've got customers now in the chemical space talking about bringing business back from China to the US, to capture $2 natural gas, 8 percent unemployment, cheap ethane and a shortened supply chain.” He specifically said that manufacturers of low-cost plastic products sold in retail chains such as Wal-Mart and Target are now thinking about returning to the US. 

Yes, an industrial renaissance is under way in the United States and a good way for investors to play this macro theme is through newly spun-off Phillips 66.

tdalmoe has no positions in the stocks mentioned above. 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.

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