Will Phillips 66 Hold Up Better Than Valero and Marathon Petroleum?

Phillips 66 (NYSE: PSX  ) will release its quarterly report on Wednesday, and investors have braced themselves for a lot of pain on the bottom line. Throughout much of the third quarter, spreads between Brent and West Texas Intermediate crude prices waned to almost nothing, and that left Phillips 66 and peers Valero Energy (NYSE: VLO  ) and Marathon Petroleum (NYSE: MPC  ) with much less advantageous conditions for profit.

As a result, profits throughout the refining industry are likely to show big drops, and share-price declines reflected that weak outlook. Yet over the past month or so, spreads have started to rise once again, raising the possibility that a rebound in earnings could come sooner than many investors have expected. If that happens, can Phillips 66 manage to make more of the opportunity than Valero and Marathon Petroleum? Let's take an early look at what's been happening with Phillips 66 over the past quarter and what we're likely to see in its report.

Stats on Phillips 66

Analyst EPS Estimate

$0.94

Change From Year-Ago EPS

(68%)

Revenue Estimate

$37.26 billion

Change From Year-Ago Revenue

(13.2%)

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Can Phillips 66 bounce back from last quarter's disappointment?
Analysts have slashed their views on Phillips 66 earnings in recent months, cutting their third-quarter estimates by nearly half and lopping almost 20% off their projections for the full year. The stock has risen from its lows, though, and has recovered 7% since late July.

Unfavorable market conditions really hammered Phillips 66 during its second quarter, as the company reported a drop of 34% in its adjusted earnings stemming from an 8% drop in revenue. Improvements in Phillips 66's midstream and marketing segments weren't nearly enough to offset drops in chemicals and the key refining segment, with narrowing spreads cutting refining earnings by more than $400 million.

Yet the impact of the falling gap between Brent and WTI hasn't just affected Phillips 66. Both Marathon Petroleum and Valero Energy have seen their margins dive in response to the changing pricing conditions in the industry. Still, investors were mostly prepared for the downturn, and so they've seen subsequent rebounds in the spread largely as unexpected bonuses rather than a return to normal conditions.

Phillips 66 has also benefited from following a trend that Marathon Petroleum used, creating its Phillips 66 Partners (NYSE: PSXP  ) master limited partnership to hold pipeline, terminal, and fractionator assets. The initial public offering of the Phillips MLP was a huge success, with shares soaring on its first day of trading, and in response, Valero said it would join Phillips and Marathon in creating a similar MLP for its logistics business.

The interesting long-term question is whether U.S. energy production will eventually threaten OPEC's dominance of the world oil markets. Phillips 66 has lagged behind Valero to some extent in seeking out domestic crude, but it expects to use solely North American oil within the next couple of years. The resulting geopolitical fallout could create vast uncertainty for the energy market in the long run, even as the U.S. could potentially gain from being less dependent on foreign energy sources.

In the Phillips 66 earnings report, watch to see what impact WTI's recent drop below the $100 per barrel level has on profits. Big spreads are important, but as gasoline prices have been falling as well, you'll have to look close to determine the total effect on Phillips 66 and how it compares with its peers.

Are refiners your best energy play?
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