Demand for refined petroleum products like gasoline and diesel have plunged because of the COVID-19 outbreak. That's having a significant impact on oil refiners like Phillips 66 (PSX 1.54%), which lost money refining oil during the first quarter.
However, thanks to its overall diversification, and strong financial profile, Phillips 66 believes it can continue paying its dividend, which currently yields 5.4%. Here's a look at why the oil company can maintain its lucrative payout.
Drilling down into Phillips 66's first-quarter earnings
|
Metric |
Q1 2020 |
Q4 2019 |
Quarter-Over-Quarter Change |
|---|---|---|---|
|
Adjusted earnings |
$450 million |
$689 million |
(34.7%) |
|
Adjusted earnings per share |
$1.02 |
$1.54 |
(33.8%) |
|
Cash from operations |
$217 million |
$1.7 billion |
(87.2%) |
Data source: Phillips 66 Partners.
The first quarter was challenging for Phillips 66. The company's earnings and cash flow plummeted because of the impact the COVID-19 outbreak had on refined product demand and margins.
However, as bad as the quarter was for Phillips 66, things would have been a lot worse if not for the company's diversification:
Data source: Phillips 66. Chart by the author.
As that table shows, the company's three other business segments performed well during the period. Midstream earnings rose nearly 14% on the strength of its natural gas liquids business, which benefited from higher propane and butane trading activity and margins at its Sweeney Hub. Phillips 66 also benefited from its investment in master limited partnership DCP Midstream (DCP), which produced higher earnings thanks to gains from its hedges and lower operating costs.
Phillips 66's chemicals segment, which consists of its CPChem joint venture with Chevron (CVX 1.82%), grew its earnings by almost 12%. The main driver was higher polyethylene sales resulting from the high demand for this material to make food packaging and medical supplies.
The marketing and specialties segment, meanwhile, delivered a 70% earnings surge. The main factor was that this segment realized higher margins by taking advantage of price differences between markets.
Those positives helped more than offset weakness in Phillips 66's refining segment, which lost money during the quarter. The company noted that margin averaged $7.11 per barrel in the period, down 25% from the fourth quarter. Meanwhile, the company used only 83% of its capacity. That's down from 97% in the fourth quarter because of maintenance activities and its decision to reduce output because of weak market conditions.
Image source: Getty Images.
A look at what's ahead for Phillips 66
Phillips 66 has taken several actions to adjust to the currently challenging refining market. Not only has it reduced production at several facilities, but it also suspended its share repurchase program, reduced capital spending, and cut operating costs. On top of that, it secured a new $2 billion term loan facility and completed $1 billion in bond issuances to help bolster its liquidity. These moves will help support the dividend while protecting the company's strong investment-grade credit rating as it continues to invest in expanding its operations.
Overall, Phillips 66 and its affiliates reduced capital spending by $700 million to $3.1 billion. As part of that reduction, Phillips 66 plans to defer the Red Oak Pipeline and Sweeny Frac 4 projects. Meanwhile, its MLP, Phillips 66 Partners (PSXP), will delay the Liberty Pipeline and postponed making a final investment decision on the ACE Pipeline. Meanwhile, DCP Midstream will probably not elect to exercise its option to acquire interests in the Sweeny Fracs 2 and 3 facilities.
While these project delays will affect Phillips 66's growth in 2021, it will preserve cash in the near term to help support its dividend and maintain a strong balance sheet. Meanwhile, the company and its affiliates can restart those projects when market conditions improve, supporting future growth.
Navigating the challenges the best it can
Phillips 66 isn't immune to the impact of the COVID-19 outbreak. However, it's in a better position than many peers to withstand this disruption thanks to its diversification and financial strength. That's allowing the company to maintain its high-yielding payout during this storm, which isn't something many other oil companies have been able to do.
