Berkshire Hathaway owns roughly 46 million shares of Phillips 66 (NYSE:PSX). But here's the thing: Warren Buffett's sprawling conglomerate owned around 80 million shares not too long ago. It agreed to sell Phillips 66 the roughly 35 million share difference in early 2018. Does that make Phillips 66 a buy or a sell? Here's a quick overview to help you figure it out.
Diversified in the downstream
Phillips 66 was spun out from ConocoPhillips in mid-2012. That move split up ConocoPhillips' upstream oil and gas drilling business from its downstream refining and processing operations, which Phillips 66 got out of the deal. Phillips 66's portfolio of assets is a little confusing, however, when you start to drill down into what it owns today.
The core of the company is a collection of 13 refineries spread across the United States and Europe. Most visibly, it sells fuels and lubricants under the Phillips 66, 76, and Conoco brands, among others. But there's much more going on here. In addition to its refining assets, it owns a 50% stake in the Chevron Phillips Chemical company, a joint venture with global energy giant Chevron. It is the general partner of and owns a significant stake in midstream limited partnership Phillips 66 Partners LP. It also owns a 50% interest in the general partner of DCP Midstream, LP, with the other 50% owned by Canadian energy giant Enbridge Inc.
At the end of the day, Phillips 66 is a well-diversified refining and midstream company with some very notable partners. Its results have been impressive, too, with its earnings increasing from roughly $6 a share in 2013, its first full year as a stand-alone company, to $9.85 in 2017. It has increased its dividend each year since becoming public, upping it from $1.33 per share per year in 2013 to $2.73 in 2017. Phillips 66 is currently reaping the rewards of a heavy growth spending period, in which its capital spending reached a peak of $5.8 billion between Phillips 66 and Phillips 66 Partners in 2015. Spending is projected to be around $2.3 billion in 2018 across both entities.
Is it worth buying today?
Longer term, the company has a target of returning 40% of its cash flow to investors via dividends, debt reduction, and stock buybacks, with the remaining 60% to be reinvested in the business. A good portion of the money reinvested in the company is for sustaining capital expenditures (roughly 55% of 2018's capital budget specific to Phillips 66 is sustaining). But the long-term goal is clearly for Phillips 66 and its various controlled and co-owned businesses to keep growing. That's a positive for buy-and-hold investors.
That said, refining and chemicals are cyclical businesses impacted greatly by the price of their key feedstocks, oil and natural gas. Although the company's midstream investments are largely fee-based, and thus generally pretty consistent money generators, that doesn't change the fact that the spread between what Phillips 66 gets paid for the products it makes and the cost of its inputs on the refining and chemicals side of the business is a key issue to watch. There are too many moving parts to pinpoint any single business here, but during the first quarter, Phillips 66 CFO Kevin Mitchell noted that, overall, he sees, "a period of reasonably strong margins ahead."
So far, Phillips 66 looks like a compelling investment, with strong performance, a dedication to growth spending, and a solid history of returning cash to shareholders via dividend growth. As long as you keep the ongoing margin risk in mind (even though things look pretty good right now), Phillips 66 probably deserves a spot on your watch list.
The only real problem today appears to be valuation. The company's price to tangible book value is roughly 2.9 times. That's about middle of the pack compared to peers Valero (NYSE:VLO), Marathon Petroleum (NYSE:MPC), and HollyFrontier (NYSE:HFC). Its price-to-earnings ratio is about in line with these peers but at the high end of the group. More concerning, enterprise value to EBITDA puts Phillips 66 well above these competitors at 12.3 times, with the next closest peer Valero at 9.6 times. At best, you can say Phillips 66 appears fairly priced, though I would err on the side of a little expensive.
No need to rush
At this point, I don't think Phillips 66 is a screaming buy. If you are specifically looking to add a refiner to your portfolio, the diversified company is worth a close look. It is doing well, returns cash to shareholders, is dedicated to investing for growth, and appears to have decent prospects over the near term if the CFO's margin outlook is on target. But you will be paying full price for the stock. And while Buffett's sale was intended to reduce Berkshire's ownership stake below 10%, it's hard not to notice that it also meant taking profits on a stock that is up around 180% since the start of 2012, the year Berkshire started to build its position. Most investors, and particularly those with a value bent, should probably wait for a better entry price.