The fourth quarter was a tough one for the refining sector as market conditions deteriorated due to concerns about falling demand. That softness, along with some maintenance activities, weighed on Phillip 66's (PSX 0.09%) financial results during the period.

However, the company was still able to produce lots of cash, which gave it funds to invest in a growing number of expansion projects, as well as in its dividend and stock repurchases. Those actions have the company well-positioned to continue creating value for its shareholders this year.

Phillips 66's fourth-quarter results


Q4 2019

Q3 2019

Q4 2018

Adjusted Earnings

$689 million

$1.4 billion

$2.3 billion

Adjusted earnings per share




Cash from operations

$1.7 billion

$1.7 billion

$4.1 billion

Data source: Phillips 66.

As the table shows, Phillips 66's adjusted earnings slumped significantly versus both the prior quarter and the year-ago period. While earnings across all its operating segments fell, its biggest weak spot was its refining business.

Phillips 66's earnings by segment in the third and fourth quarters of 2019

Data source: Phillips 66. Chart by the author.

After adjustments, Phillips 66's pretax income from refining tumbled nearly 60% compared to the third quarter. Driving down its results were maintenance activities and lower margins on refined products  due to weaker market conditions. While refining margins can fluctuate significantly, they should rebound this year due to new fuel standards in the shipping sector.

Midstream earnings, meanwhile, fell 8% sequentially. The main driver of that decline was lower natural gas liquids (NGL) earnings due to weaker propane and butane trading results. Those factors more than offset the combination of improved transportation earnings thanks to higher pipeline and terminal volumes, and the boost Phillips 66 got from its increased investment in DCP Midstream (DCP).

Chemicals income slumped about 34% from Q3 due to weaker margins and seasonally lower volumes in CPChem, its joint venture with Chevron. That business also had some higher maintenance costs during the quarter.

Finally, earnings in the marketing and specialties segment plunged about 42% sequentially due to lower margins. That was mainly because of seasonality and less favorable market conditions, as the third quarter was a strong one for this segment. The company also only exported 157,000 barrels per day (BPD) during Q4 compared to 220,000 BPD in Q3.

Despite those tougher market conditions, Phillips 66 still generated $1.7 billion in cash from operations during the fourth quarter, which was nearly 2% higher than its third-quarter result. The company paid $398 million of that money out to shareholders via its dividend and used another $412 million to repurchase shares. Since 2012, the company has reduced its outstanding share count by an impressive 33%. Meanwhile, Phillips 66 reinvested the rest of the money -- along with some incremental borrowing it added to its top-notch balance sheet -- into capital projects, funding a total of $1.3 billion of those during the period.

Pipelines heading to a refinery with the sun shining in the background.

Image source: Getty Images.

What's ahead for Phillips 66

Phillips 66 plans to invest another $3.3 billion in capital projects this year, including $2.15 billion on growth-related ones. The bulk of that money ($1.9 billion) will be on midstream projects, with its MLP Phillips 66 Partners (PSXP) funding $867 million of that on its balance sheet. Major midstream projects for Phillips 66 include the Liberty and Red Oak oil pipelines, and additional NGL processing capacity. Meanwhile, Phillips 66 Partners will finance its share of construction on the Gray Oak and Bakken oil pipelines, the C2G ethane pipeline, and an oil export terminal near Corpus Christi, Texas.

Most of the rest of its spending will be on refining projects, about $1.05 billion, with 60% of that on sustaining projects and the other 40% on growth. All the expansion-related spending will be on high-return, quick-payout projects designed to boost the company's margins.

In addition to the projects Phillips 66 and its MLP will finance, the company's joint ventures will fund an additional $1.2 billion (Phillips 66's share) of capital projects this year. DCP Midstream plans to spend several hundred million dollars on expanding its operations, including potentially investing $400 million to acquire stakes in two of Phillips 66's NGL processing expansions. Meanwhile, CPChem plans to invest capital in developing world-scale petrochemical projects along the U.S. Gulf Coast and in Qatar. 

This expansion-related spending should help improve the company's margins and cash flow in the coming years. That will give it more money to return to shareholders via its steadily growing dividend and needle-moving share-repurchase program.

Still turning crude into cash

Phillips 66 battled through some tough market conditions during the fourth quarter, and they weighed on its results. However, the company still managed to generate lots of cash. It used those funds to enrich its investors via its dividend and stock-buyback program, while allocating the rest to high-return expansion opportunities. That balanced approach should enable it to continue creating value for its investors over the long term.