Refining giant Phillips 66 (NYSE:PSX) will unveil its results for the fourth-quarter of 2016 later this week. While the actual results aren't yet known, investors should already have a pretty good idea what to expect to see in that release. That's because several of its peers have already reported and the company was supposed to complete construction of several key expansion projects. Given those and other factors, here are three things investors should expect this quarter.
Expect another tough quarter for the refinery segment
Phillips 66's refinery segment has been under pressure over the past year because of a significant decrease in the crack spread, which is the margin refiners earn from turning oil into refined products such as gasoline. This spread has come down from a lucrative $21.44 per barrel for gasoline in the third quarter of 2015 to just $7.23 per barrel last quarter, though it was up from $7.13 in the second quarter.
Unfortunately, margins didn't improve that much during the fourth quarter, according to what fellow refiner Valero (NYSE:VLO) reported earlier this week. Further, Valero noted that refining earnings continued to be under pressure because of higher costs to meet its biofuel blending obligations as a result of the skyrocketing price of renewable identification numbers (RINs). For the year, Valero spent $749 million on RINs, up from $309 million in the year-ago quarter. Given what Valero reported, Philips 66 investors can expect that its refinery segment experienced a tough quarter as well.
Expect an improvement in midstream earnings
Earnings in Phillips 66's midstream segment were also weak last year, down 25.2% through the first nine months compared with the same period in 2015. Driving that decline were losses stemming from its equity investment in DCP Midstream (NYSE:DCP), higher planned maintenance, losses from the timing of seasonal NGL storage, and other issues.
However, DCP Midstream started turning things around last quarter thanks to higher commodity prices, the impact of contract restructuring, and lower costs, which should lead to continued improvements in its results. In addition to that, Phillips 66 should have completed construction of two midstream projects during the quarter and started collecting income from these assets. If everything went according to plan, midstream earnings would have improved from the prior quarter.
Expect continued consistency from chemicals and marketing
Philips 66's other two business segments have been relatively stable this year, and that trend probably continued during the fourth quarter. While earnings in its 50/50 chemicals joint venture with Chevron (NYSE:CVX), CP Chem, declined 30.4% through the first nine months, that was primarily due to a big drop in margins during the first quarter, pushing adjusted earnings down to $154 million. However, that segment's results improved during the second and third quarters, with it delivering adjusted earnings of $190 million in both quarters. It's likely that profits remained around that level, which we can infer because Chevron has already reported its fourth-quarter results. While the oil giant doesn't specifically break out CP Chem's earnings, it did note that the primary drivers of the decline in its downstream segment's earnings last quarter were lower margins from refined product sales and taxes.
Meanwhile, Phillips 66's marketing and specialties segment has delivered relatively steady results all year. Driving that stability were solid margins on retail petroleum product sales due to healthy demand, steady refined product exports, and improving earnings from its specialty business. Given that the market environment remained robust last quarter, investors should expect consistent results from these business lines.
By taking what peers are reporting and combining it with recent trends and other events, investors already have a pretty good idea what to expect to see in Phillips 66's fourth-quarter results. However, given those expectations, investors should pay close attention to make sure results come in as anticipated. If not, dig deeper to see what caused results to fall short, looking whether it was just a one-time event or part of a concerning new trend.
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