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After seeing other refining companies report second-quarter earnings, expectations for Phillips 66's (NYSE:PSX) results were pretty muted. Compared to this time last year, earnings fell 49% to $0.93 per share, Much of that decline has more to do with the current oil and refined product markets than Phillips 66 itself, though.

Here's a quick recap of the company's earnings and what investors should take away from this quarter's earnings. 

By the numbers

Results (in millions, except per share data) Q2 2016 Q1 2016 Q2 2015
Revenue $22,307 $17,760 $29,077
Operating income $720 $596 $1,465
Net income $496 $385 $1,012
EPS $0.93 $0.72 $1.84

Data source: Phillips 66 supplementary earnings release. 

The thing that really jumps out in Phillips 66's most recent earnings is the major decline in refining margins. Earnings from its refining segment declined more than 75% compared to this time last year. Across all of Phillips 66's refining regions, we saw considerable declines in refining margins. This is in contrast with the company's refining operations, which actually saw solid results. The company achieved 100% capacity utilization across all of its facilities, and its clean product yield -- the amount of gasoline & diesel as a percentage of total products produced -- was 84%.

This isn't that surprising, though. Many of Phillips 66's peers had similar results, where operations were very solid, but the market refining margins and higher costs to comply with the Renewable Fuels Standard took a bite out of earnings. 

Data source: Phillips 66 earnings release, author's chart.

Despite the decline in earnings, the company continued its program of returning large chunks of cash to shareholders. After generating $1.1 billion in operational cash flow after a hefty drawdown in working capital, management increased its dividend by 12% and bought back a net of $240 million in shares for the quarter. In the four years since Phillips 66 was spun off from its former parent, ConocoPhillips, the company has more than tripled its dividend and bought back 16% of all shares outstanding.

PSX Average Diluted Shares Outstanding (Quarterly) Chart

PSX Average Diluted Shares Outstanding (Quarterly) data by YCharts.

The highlights

Phillips 66's earnings don't show it right now, but the company's largest investments in growth are in its Midstream segment. In 2015, 77% of the company's $5.7 billion in capital spending went into its midstream segments, and so far this year, it has spent more than half of its $1.37 billion capital program on midstream investments. The largest of these midstream investments include its Liquefied Petroleum Gas export terminal in the Gulf Coast, 3.2 million barrels of crude storage at its Beaumont, Texas, facility, as well as the 470,000 barrel per day Dakota Access Pipeline and Energy Transfer Crude Oil Pipeline. Both the export terminal and crude pipeline are expected to be operational by the end of the year, while construction of the crude oil terminal will be complete by mid-2017.

One of the benefits of investing in these kinds of projects is that, for the most part, earnings and cash flows tend to be much more steady than the volatile ups and downs of refining and chemical manufacturing. It will likely take much more investing on this side of the business before it generates enough cash flow to offset Phillips 66's massive chemical and refining operations, but it's certainly a step in the right direction.

From the mouth of management

One of the things CEO Greg Garland really stressed in the company's conference call was its more diverse business model. Even though Refining struggled, Phillips 66 showed that it pays to have assets in Midstream & Marketing instead of just pure refining, like other independent refiners.

The market environment remained challenging as low margins continued to impact our DCP Midstream, NGL trading and Refining businesses. However, our fee-based Midstream business performed well, and we continue to see good demand in Chemicals. Although demand for refined products is up relative to last year, the weighted average market crack was more than $5 per barrel from where it was a year ago and crude differentials remained tight. We remain focused on executing our strategy in those areas under our control. Our growth projects are all progressing well, and we continue to see great value and opportunity long term.

Another thing he stressed was that the company expects to keep a high rate of returning capital to shareholders:

We're mindful of the current market environment, and we've maintained our capital-disciplined approach in terms of how we allocate capital. We continue to target a long-term 60-40 split between reinvestment in our business and distributions back to the shareholders.

What a Fool believes

There isn't much a refiner can do when the price spread between crude oil and refined products decline, and Phillips 66's recent results were a reflection of that. Investors looking at the long term shouldn't get too caught up worrying about the refining margins. Instead, their focus should be on the company's ability to run its facilities efficiently and spend its capital effectively on high rate of return projects. Based on this quarter, the company is doing just that.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.