If there is one thing Phillips 66 (NYSE:PSX) has done well since it became a publicly traded company, it's return loads of cash to shareholders. Not only does it have a generous dividend that yields 3.4%, but it also has bought back an incredible amount of shares to boost earnings per share. This past quarter, the company really went out of its way to emphasize these points as the reason why investors should invest in the oil refiner. Management announced another double-digit increase to the dividend and the intention to buy back shares at an accelerated rate.
Let's take a quick look at what happened this past quarter at Phillips 66 and whether the company's current results are a sign of things to come.
By the numbers
|Metric||Q4 2018||Q3 2018||Q4 2017|
|Revenue||$29.8 billion||$30.6 billion||$30.1 billion|
|EBITDA||$3.36 billion||$2.43 billion||$1.1 billion|
|Operating cash flow||$4.14 billion||$582 million||$1.93 billion|
Sure, this past quarter's results were good, but they weren't $4.1-billion-in-operating-cash-flow good. This past quarter, the company had a sizable drawdown in working capital that came on the heels of a large working capital build in the prior quarter. For all of 2018, Phillips 66 generated $7.5 billion in operating cash flow, so it helps to put those numbers into perspective. It's also worth pointing out that the company had a large one-time gain this time last year related to the changes in corporate tax rates.
The real needle mover for Phillips 66 this past quarter was its refining segment, which churned out a net earnings result almost four times what we saw this time last year. Refining benefited immensely from high refining margins, specifically for distillate products like diesel and jet fuel. Management helped its own cause by running its facilities at almost maximum capacity the entire quarter -- refinery utilization rates were 99% -- and it geared its facilities to maximize gasoline and diesel output with an 86% clean product yield. The rest of the business performed admirably as well, with record results from its marketing & specialties and midstream businesses, but refining results were just that good.
Over the past few years, much of the company's growth capital spending has been for its midstream segment. It appears the trend will continue in 2019. In the company's capital budget for this year, it expects to spend about $2.9 billion. A little less than half of that will go toward midstream assets that include its investments in subsidiary master limited partnership Phillips 66 Partners (NYSE:PSXP). Management still believes that the greatest source of returns right now is increasing pipeline access from high-growth shale basins to major demand centers such as the U.S. Gulf Coast.
During the quarter, it announced it was soliciting interest in an open season for two new crude oil pipelines. The Liberty pipeline would transport 350,000 barrels per day of crude from the Bakken and other shale basins in the Rockies to Corpus Christi, Texas, and the Red Oak pipeline would transport 400,000 barrels from major oil hub Cushing, Oklahoma, to points in Corpus Christi, Houston, and Beaumont, Texas.
Phillips 66 also announced it was partnering with Renewable Energy Group (NASDAQ:REGI) to build a large-scale renewable diesel plant in Washington adjacent to Phillips 66's existing facility in the state.
What management had to say
One of the things that Phillips 66 has done a spectacular job of since it was spun out of ConocoPhillips is generate loads of cash and return a large chunk of it to its investors. So on the company's conference call, CEO Greg Garland highlighted the numbers for its shareholder return program to really drive home the point that the company will continue to reward shareholders with a generous amount of cash.
In 2018, we increased the quarterly dividend 14% and repurchased 10% of the shares outstanding, resulting in $6.1 billion of capital being returned to our shareholders. Since 2012, we returned $22.5 billion to shareholders through dividends, share repurchases and exchanges, reducing our initial shares outstanding by 30%. Disciplined capital allocation is a priority and we are committed to a secure, competitive and growing dividend. As we look to 2019, we expect to deliver another double-digit dividend increase. Through our ongoing share repurchase program, we continue to buy shares when they trade below intrinsic value as demonstrated by our fourth quarter pace of repurchases.
Priced like the good times won't last
Results like these don't come around often in the refining business. Phillips 66 and the rest of the refining industry have benefited immensely from incredibly high refining margins thanks to cheap domestic and Canadian crude oils compared to other international crude sources. The reason the stock hasn't benefited from this earnings surge is likely because the market doesn't think it will last. Massive investments in pipelines and export facilities will likely mean the prices between these types of crude will narrow and reduce refining margins. The nice thing for Phillips 66 investors is that the company is making investments in infrastructure such that it can capture value either way.
Obviously, if refining margins narrow, we can reasonably expect Phillips 66's earnings to decline, so looking at its price-to-earnings ratio of 8 and saying it's cheap is a bit trite. That said, the company's ability to reward shareholders with a rather generous dividend and copious amounts of share repurchases means there is value in this stock even if we do see lower earnings. For investors looking at the oil and gas industry, this refining stock is one worth considering.