Philips 66 (PSX +2.27%) has made a concerted effort over the past few years to invest capital in growing its non-refining businesses so it can reduce earnings volatility. That volatility was on full display last year when refining profits collapsed due to shirking margins. That said, 2017 marks a turning point for the company because the bulk of its major projects are nearing completion. While that will bolster its future cash flow, it does beg the question of where the company grows from here.
What's coming down the pipeline?
In early December, Phillips 66 announced its 2017 capital program, with the refining giant setting its budget at $2.7 billion, which included $437 million of spending at its MLP Phillips 66 Partners (PSXP +0.00%). That spending level is a noticeable drop from last year's budget when the company earmarked $3.6 billion for capex, which excluded capital spent at Phillips 66 Partners. The company noted that the budget was lower because several of its major projects were nearing completion.
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The biggest spending decline will come in the company's midstream segment, where growth spending will go from $1.8 billion last year to $942 million this year. Driving that decline was the recent completion of the company's Freeport LPG Export Terminal, which entered service last December. Meanwhile, the company, and its partners Energy Transfer Partners (ETP +0.00%) and Sunoco Logistics Partners (NYSE: SXL) expect to complete their controversial Dakota Access Pipeline early this year. Phillips 66 owns a 25% stake in the $4.8 billion project. Finally, the company's midstream business will finish up the expansion of its Beaumont Terminal this year.
Meanwhile, growth spending in both the refining and marketing and specialties segments will also decline this year. The company expects to spend $317 million on "small, high-return, quick pay-out projects, primarily to reduce feedstock costs and improve clean product yields" in the refining segment, down from the $384 million it spent last year on projects. Finally, marketing and specialty growth spending will drop from $80 million last year to $75 million this year.
In addition to that, the company's chemical's joint venture, CPChem, will finish up construction on two polyethylene facilities by mid-year. Though it's worth noting the capital for these and other chemicals projects are not reflected in the company's budget because they're self-funded within the joint venture.
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Where does it grow from here?
After these projects enter service, Phillips 66 will have few remaining long-term projects within its corporate structure. That said, it still has plenty of growth left in the tank at its affiliated entities. For example, CPChem expects to complete its ethane cracker by the second half of next year. Once finished, CPChem's capacity will expand by 50% and will generate a substantial amount of free cash flow that should head back toward Phillips 66.
In addition to that, the company has several expansion projects under way at its affiliated MLPs Phillips 66 Partners and DCP Midstream (DCP +0.00%). Phillips 66 Partners, for example, is working on the Bayou Bridge Pipeline, which is another joint venture with Sunoco Logistics Partners and Energy Transfer Partners. The companies expect the second phase of that project to enter service by the end of this year. In addition to that, Phillip 66 Partners has been increasingly seeking out third-party growth opportunities. For example, in August the company acquired NGL logistics assets in Louisiana from a third-party and signed a pipeline joint venture agreement with Plains All American Pipeline (PAA 0.35%). That agreement will enable Plains All American Pipeline to expand an existing pipeline in the STACK play of Oklahoma while opening the door for additional expansion opportunities in the future.
Meanwhile, DCP Midstream recently announced several new growth projects. In the DJ Basin, the company will build a new processing plant that should come online later next year with an additional facility following in 2019. These projects will expand DCP Midstream's processing capacity in the region by 50%. In addition to that, the company also recently announced a 30% capacity expansion for the Sand Hills NGL pipeline, which is 33% owned by Phillips 66 Partners. The companies expect to finish that project the end of this year.
Investor takeaway
While growth spending is winding down at Phillips 66, that doesn't mean its growth days are over. That's because more future spending will be in affiliated companies such as CPChem, Phillips 66 Partners, and DCP Midstream. That will free up cash flow at the parent company level, enabling Phillips 66 to return more money to investors.
