Phillips 66 (PSX +3.21%) isn't just a refining company. Instead, it bills itself as a diversified energy manufacturing and logistics company. One of the things it manufactures is chemicals, which sets it apart from other refiners. Not only does that segment provide the energy manufacturer with relatively consistent earnings, but it's poised to produce robust growth over the next few years.
Choosing to be different
As the following chart shows, Phillips 66, Valero Energy (VLO +3.72%), Marathon Petroleum (MPC +4.15%), and Tesoro (TSO +0.00%) all do more than just refine oil into gasoline:
Data source: Phillips 66, Valero, Marathon Petroleum, and Tesoro. Chart by author. In millions of dollars.
That said, for most of these refiners, the bulk of the earnings generated from the other segments primarily relates to the transportation, storage, and marketing of refined products via associated midstream assets and branded stores. In Valero's case, it operates ethanol plants, which directly relate to its refining operations. Meanwhile, Tesoro operates a midstream business and branded stores, which both primarily serve its core refining business.
Marathon Petroleum also operates branded stores and midstream assets that provide logistics services to its refineries. The company's midstream business, like Phillips 66's, has expanded well beyond just providing support to its core refining operations.
However, where Phillips 66 truly differentiates itself from this group is that it also manufactures chemicals via its CPChem joint venture with oil giant Chevron (CVX 1.42%). It's an important business to Phillips 66 because it provides a bit more earnings stability than its refining business. For example, while earnings in its refining segment cratered nearly 90% last year because of shrinking margins and other issues, profitability in chemicals only declined about 30% due to weaker margins.
Image source: Getty Images.
One more way to grow
The joint venture with Chevron also provides Phillips 66 the ability to expand earnings capacity. That's because refiners, for the most part, have limited internal growth options since the industry has adequate capacity. As a result, most expansion capital in the refining segment gets invested in smaller projects designed to boost yields or process a cheaper variety of oil. For example, Phillip 66 plans to spend about $300 million across several projects this year, including increasing the heavy oil processing capacity at its Billing Refinery to reduce feedstock costs. Aside from that, the other way refiners typically increase capacity is via acquisitions, which is what Tesoro is doing by bidding more than $6 billion to acquire Western Refining (WNR +0.00%) and its three refineries.
Because refiners have limited internal growth options, most have turned to the midstream segment in search of growth. All four have created master limited partnerships to help drive this growth, which has focused on expanding their access to cheaper North American crude. Both Phillips 66 and Marathon Petroleum have stepped out even further into the midstream space by building and buying assets focused on the gathering, processing, storage, and transportation of natural gas and NGLs.
However, Phillips 66 has taken its growth outside the oil refining space even further through its joint venture with Chevron. That expansion all started in 2010 when CPChem began working on a major Gulf Coast Petrochemicals expansion project, which includes a large ethane cracker and two polyethylene units. Overall, the partners are investing $6 billion in these projects, which should start coming on line later this year. Once complete in the second half of next year, it will expand CPChem's capacity by one-third. Meanwhile, that expanded capacity, as well as the associated reduction in capital expenses, should fuel a big boost to Phillips 66's cash flow over the next few years.
Investor takeaway
Phillips 66 has strategically invested capital in industries adjacent to refining to reduce its exposure to that sector as well as drive future growth. One segment where it has differentiated itself from rivals is its investments in the chemicals sector, which should start paying dividends later this year when the first of several expansions come on line. It's growth that could give it a leg up on the competition if the refining sector's doldrums continue.
