This Oil Stock Continues to Focus on Capturing This $800 Billion Opportunity

Diversification is paying big dividends for this refining company.

Matthew DiLallo
Matthew DiLallo
Dec 17, 2018 at 9:47AM
Energy, Materials, and Utilities

Phillips 66 (NYSE:PSX) is one of the nation's largest independent refining companies. While refining can be a very profitable business, it doesn't offer much growth, since demand for refined products in America isn't expanding all that much these days. So the company needs to look elsewhere to grow.

In Phillips 66's case, that's not an issue, because it operates a diversified portfolio of energy manufacturing and logistics businesses, which also includes operations in the chemicals and midstream sectors. The company's midstream business is especially well positioned to grow, considering North American energy companies need to invest $800 billion through 2035 in building new infrastructure to meet the industry's needs. The company has worked hard to capture a share of this vast opportunity, which is evident in its investment plans for 2019.

A sign with the word opportunity and an arrow.

Image source: Getty Images.

Drilling down into Phillips 66's 2019 budget

Phillips 66 and its affiliated companies expect to invest about $2.7 billion on expansion projects in 2019, more than 40% increase from the $1.9 billion spent during 2018. The company plans to invest two-thirds of this capital, or about $1.8 billion, on midstream expansions. 

Phillips 66 expects to finance roughly $850 million of its growth-focused midstream projects on its balance sheet. These investments include expanding its Sweeny Hub, where it's building two natural gas liquids (NGLs) fractionators that will separate higher-valued products such as ethane and propane from raw NGLs, as well as additional NGL storage capacity and pipeline infrastructure. The company also expects to continue expanding its Beaumont Terminal, a large storage complex in Texas, as well as to invest in pipeline projects to further integrate its system.

In addition to the projects Phillips 66 plans to fund, the company's two master limited partnerships (MLPs), Phillips 66 Partners (NYSE:PSXP) and DCP Midstream Partners (NYSE:DCP), have several expansions under way. Phillips 66 Partners expects to spend more than $500 million on capital projects in 2019, including funding its share of construction on the Gray Oak oil pipeline and the South Texas Gateway Terminal, which will move oil from the Permian Basin to refineries along the Gulf Coast as well as export crude overseas. Phillips 66 Partners will also invest in expanding its Clemens Caverns NGL storage facility at the Sweeney Hub, as well as build a unit at Phillips 66's Lake Charles Refinery to increase the production of higher-octane gasoline blend components.

Meanwhile, DCP Midstream expects to invest $450 million in 2019 on several projects. The company is one of the partners on the Gulf Coast Express natural gas pipeline, which should start up in October of next year. In addition, it's building natural gas processing plants in the DJ Basin as well as continuing to expand its NGL pipeline system.

A close-up of a gas pipeline under construction.

Image source: Getty Images.

More midstream investments could be on the way

The projects Phillips 66 has lined up for 2019 should enable the company to continue growing earnings and cash flow at a healthy pace in the coming years. However, in addition to the projects it has under way, the company has several others in the pipeline that could fuel future growth. The refining and logistics giant is currently working on two new oil pipeline developments that could start up by the end of 2020 if it secures enough shippers. The company and another partner have proposed building the Liberty Pipeline, which would move 350,000 barrels of oil per day (BPD) from the fast-growing Rockies and Bakken regions to Corpus Christi, Texas. Meanwhile, Phillips 66 has also proposed the construction of the 450,000 BPD Red Oak pipeline, which would move crude from a major storage hub in Oklahoma to destination points in Corpus Christi, Houston, and Beaumont.

Both of the company's MLPs have additional expansion projects in development. Phillips 66 Partners, for example, is already looking to extend the Grey Oak pipeline further into West Texas. If it secures enough shippers, the pipeline expansion could be in service by the end of 2020. Meanwhile, DCP Midstream and a partner also have the Gladiator crude oil pipeline in development, which would move oil from an Oklahoma hub to Houston. If Phillips 66 and its MLPs move forward with these projects, it will help them continue growing earnings and cash flow at a meaningful rate in the coming years. 

A big-time growth driver

While the refining industry lacks growth opportunities, the midstream sector has no shortage. That has been a boon to Phillips 66, because it has been able to reinvest some of its refining cash flows to capture opportunities to expand its midstream footprint. As a result, the company has the potential to grow its earnings and cash flow at a faster rate than its more refining-focused peers, which could give it the fuel to create more value for its investors over the long haul.