Is Spending More the Right Move for Phillips 66?

Phillips 66 (NYSE: PSX  ) announced Wednesday that it will boost its 2014 capital spending program and return additional cash to shareholders through a share buyback program. The increased spending will go mainly toward accelerating the development of two key midstream projects. Let's take a closer look at why the company's moves should improve shareholder value over the long run.

Photo credit: Phillips 66

Phillips to boost spending and buy back more shares
Phillips will boost its 2014 capital spending by $1.2 billion, bringing its total capital budget for the year to $3.9 billion. The additional capital will go toward accelerating the development of the Sweeny Fractionator One and Freeport Liquid Petroleum Gas Export Terminal, as well as to finance the recently announced acquisitions of the Beaumont Terminal and Spectrum Corporation, a specialty lubricants company, Phillips said.

The company will also pursue an additional $2 billion share repurchase program. That brings its total share repurchase authorization since the third quarter of 2012 to a whopping $7 billion. As of the first quarter of 2014, Phillips had bought back $3.2 billion of its own shares. It also continues to return more cash to shareholders through increases in its quarterly dividend, which it raised by 28% in May.

While the budget and schedule for the Sweeny fractionator and the Freeport LPG terminal remain unchanged, according to a company spokesman, the increased budget will allow the company to fund a greater portion of these projects with cash, as opposed to debt or other more costly forms of funding.

Big boost to EBITDA
The company expects to bring the Sweeny fractionator online in the third quarter of next year, while the Freeport LPG export terminal is expected to commence operations in mid-2016. Both projects should pay off handsomely for the company as they will provide a big boost to EBITDA immediately after startup.

In the first year of service, they should generate a combined EBITDA of $490 million and an estimated profit of $210 million. This should help the company's midstream segment generate an estimated $1.5 billion in EBITDA by 2017.

The fractionator, which will be located in Old Ocean, Texas, near the company's Sweeny refinery, will separate natural gas liquids into components, such as ethane, propane, and butane. It will supply some 100,000 barrels per day of these purity NGLs to petrochemical and heating markets.

The Freeport LPG export terminal, which will be located at Phillips 66's existing marine terminal in Freeport, Texas, will initially export some 4.4 million bbl/month of LPG sourced from the company's Sweeney fractionator, as well as from its nearby Gulf Coast Fractionators site and Enterprise Products Partners' (NYSE: EPD  ) Mont Belvieu fractionator.

Both projects are part of the company's midstream growth strategy and will benefit from two main factors. First is the continued strong growth in natural gas liquids production, which feeds demand for fractionation and export facilities, and second is their competitive location along the Gulf Coast outside of Mont Belvieu.

This location advantage positions the export terminal perfectly to supply growing international demand for fuels like propane and butane. Indeed, fuel exports have been a bright spot for Phillips 66 in recent quarters, helping offset weaker margins in its refining business. By 2016, the company expects to boost its fuel export capacity to 550,000 barrels per day, up from 410,000 barrels per day last year.

Investor takeaway
By increasingly focusing its investments on its midstream and chemicals segments, which feature stronger and more stable margins than its historically volatile refining segment, Phillips' revenues should become more stable over time. This should provide greater security to its dividend, as well as a major competitive advantage over its downstream peers that are focused exclusively on refining.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.


Read/Post Comments (0) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3025937, ~/Articles/ArticleHandler.aspx, 10/24/2014 5:54:59 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement