Phillips 66 (NYSE:PSX) has been slowly winding down a major growth phase over the past year. The company has expanded an important storage and export terminal while also working with partners to place a large oil pipeline into service and complete a massive petrochemical facility. As those projects wound down, so did capital spending, which raised the question of where Phillips 66 would grow from here.

The company answered that question this week by announcing plans to invest up to $1.5 billion in expanding its Sweeny Hub. That project positions the company to continue growing value for investors in the coming years.

A burst of sunlight shining on a pipeline.

Image source: Getty Images.

A project worth waiting for

Last year, Phillips 66 initially set its capital budget about $1 billion lower than the prior year due to the company's "disciplined approach to capital allocation," according to CEO Greg Garland, who further commented that "returns on our investments are important," which was why the company planned to reduced spending since "fewer projects meet our return thresholds." It set this year's budget even lower as it continued to maintain its capital discipline until the right projects came along.

Phillips 66 has found a project worthy of its capital in the expansion of its Sweeny Hub. Phillips 66 plans to invest up to $1.5 billion to build two 150,000-barrels-a-day (BPD) natural gas liquids (NGLs) fractionators, which will separate the NGLs into various streams, including ethane, propane, and butane. The company secured NGL supplies supporting this project from several customers, including from DCP Midstream (NYSE:DCP), which is an MLP it jointly controls with Enbridge. As part of that agreement, DCP Midstream has the option to buy a 30% stake in the fractionators upon completion. In addition to building those two new facilities, Phillips 66 will also construct more NGL storage capacity and associated pipeline infrastructure at Sweeny. The expansion should be up and running by late 2020.

A key link in the energy value chain

The Sweeny Hub expansion is a "key part of our midstream growth strategy," said Garland, as it "further optimizes our integrated NGL value chain." That chain starts with a link to fast-growing production basins to the West via pipelines co-owned by DCP Midstream and the company's other MLP, Phillips 66 Partners (NYSE:PSXP). Last month, those companies announced that they would connect their Southern Hills NGL pipeline to the DJ Basin, which would bring more NGL volumes toward Phillips 66's Sweeny Hub. Meanwhile, the companies are also expanding their Sand Hills NGL Pipeline to move volumes from the Permian Basin toward Sweeny.

Because those growing NGL volumes need to be separated, stored, and then sent further downstream, it has opened the door for Phillips 66 to expand its Sweeny Hub. That facility currently includes one 100,000 BPD NGL fractionator owned by Phillips 66 Partners and access to 9 million barrels of NGL storage capacity at Phillips 66 Partners' nearby Clements Caverns. In addition, Phillips 66 operates a 200,000 BPD of LPG export facility at Sweeny, which ships propane and butane to global markets. In the meantime, Phillips 66 also co-owns a newly expanded petrochemical complex in the region, which consumes ethane and propane. The hub's proximity to both export docks and petrochemical facilities gives it strong strategic position in the market, which increases the likelihood that the company can continue expanding Sweeny in the future.

Steadily growing value

Phillips 66's midstream growth strategy has paid off for investors over the years. Shares are up more than 250% since the company's spinoff in 2012, which freed it up to pursue its current path. Now with more midstream growth lined up, it increases the probability that Phillips 66 can continue creating value for investors in the coming years.

Matthew DiLallo owns shares of Enbridge and Phillips 66. The Motley Fool owns shares of Enbridge. The Motley Fool has a disclosure policy.