Shares of Phillips 66 (NYSE:PSX) have been quite volatile this year. The refining company's stock tumbled more than 60% at one point because of the impact the COVID-19 outbreak had on demand for refined products like gasoline and jet fuel. While it has recovered some lost ground, shares are still down about 30% this year.

That sell-off likely has investors wondering if the oil stock is now worth buying. Here's a look at the case for and against buying shares these days.

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

Image source: Getty Images.

The Phillips 66 buy thesis

Phillips 66 has a long history of creating value for investors. Since its spinoff in 2012, the company has returned $26 billion in cash to investors via a steadily rising dividend and share repurchase program that has retired more than 33% of its outstanding stock. Those cash returns are part of a balanced capital allocation approach aimed at distributing 40% of its cash flow to investors and retaining the other 60% for reinvestment.

One thing that sets Phillips 66 apart from other refiners is where it invests the bulk of its expansion-related capital. While it does fund quick-payout projects to reduce costs and enhance refining margins, many of its growth-related investments are in the midstream sector. Its strategy centers around building oil pipelines to the Gulf Coast, increasing export capacity, and enhancing its natural gas liquids (NGL) operations. These midstream assets, some of which it builds within its MLPs DCP Midstream (NYSE:DCP) and Phillips 66 Partners (NYSE:PSXP), primarily produce stable earnings backed by long-term, fixed-fee contracts. These investments benefit its core refining business by increasing its access to low-cost North American crude oil while also enhancing its access to export markets.

With its growth-focused investments generating steadily rising cash flow, Phillips 66 should continue returning an increasing amount of cash to its investors in the future. That puts it in a solid position to enhance shareholder value over the long term.

The Phillips 66 bear case

While Phillips 66 has focused its investments on expanding its stable midstream operations, it still has significant exposure to commodity price volatility. That was clear during the first quarter as the COVID-19 outbreak caused substantial swings in prices as well as impacted demand. That market upheaval caused Phillips 66's earnings to plunge 35% while its cash flow plummeted 87%. The biggest culprit was its refining business, which lost money as margins shrank, and its utilization declined because of weak demand. While refined product consumption has rebounded during the second quarter as governments have eased restrictions on travel and nonessential businesses, it could be years before jet fuel bounces back to its previous level.

The significant deterioration in market conditions forced Phillips 66 to quickly adapt so that its finances didn't suffer. These actions included suspending its share repurchase program and reducing capital spending. It delayed several projects, including oil pipeline developments at Phillips 66 Partners. While that will save it some money in the near term, allowing it to protect its strong balance sheet, the project delays will impact growth in the coming years. Meanwhile, DCP Midstream slashed its distribution by 50% and probably won't exercise its option to acquire stakes in two NGL-related projects, which will impact Phillips 66's cash flow and financial flexibility.

This oil stock isn't for everyone

The refining sector can be quite volatile. That was on full display this year, as Phillips 66's earnings have been under pressure due to challenging market conditions. Because of that, some investors might not want Phillips 66 in their portfolio.

However, for those who do want some oil exposure, Phillips 66 is an ideal option. It has a knack for generating cash in both good and bad times. It's also an adept allocator of capital, which includes making prudent moves to pull back on spending when market conditions are weak. Those factors should enable the company to continue creating value for investors in the coming years, especially off of its currently lower valuation.