What happened
Shares of Phillips 66 (PSX -2.51%) fell as much as 5.6% by 11:30 a.m. ET on Thursday. The primary factor weighing on the refining stock was lower oil prices. Another likely contributor was the follow through from an analyst downgrade on Wednesday.
So what
Crude oil prices continued their recent slide today. WTI, the primary U.S. benchmark price, was down over 4% in early morning trading, pushing it below $85 per barrel. Weighing on crude prices are concerns the Federal Reserve will deliver another sizable rate increase to cool inflation, which might cause an economic downturn. A recession would likely curb demand for oil and refined petroleum products. That would impact Phillips 66's refining volumes and margins, weighing on its earnings.
The renewed weakness in the oil market comes the day after Wolfe Research analyst Sam Margolin downgraded Phillips 66 from outperform to peer perform. On the one hand, the analyst believes Phillips 66 should trade at a premium valuation multiple to its peers because of its better business mix that includes refining, midstream, chemicals, and marketing operations. Further, the analyst believes Phillips 66's potential deal to acquire DCP Midstream is fundamentally sound. However, the analyst thinks that the company's refining rivals are in a better position to deliver shareholder return catalysts than Phillips 66.
Now what
Phillips 66's refining operations ebb and flow with the economy. When it's accelerating, that drives demand for the refined products it produces. However, when it slows, that can significantly impact the company's refining earnings.
It has been working to reduce this impact by investing in expanding its less economically sensitive midstream and chemicals operations. This strategy led it to offer to buy the remaining interest in DCP Midstream it doesn't already own to enhance its natural gas liquids strategy. That should enable it to produce steadier cash flow in the future, putting its 4.7%-yielding dividend on a firmer foundation and increasing its attraction for income-seeking investors.
