When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Phillips 66 (NYSE: PSX) today, and see why you might want to buy, sell, or hold it.
If you’re not familiar with the company, you probably should be. With a hefty market capitalization of about $25 billion, it’s the result of a spin-off from ConocoPhillips (NYSE: COP), and is the United States’ largest independent oil refiner.
Buy
If you’re drawn to the oil industry, perhaps because you don’t see alternative energies replacing our heavy dependence on it anytime soon, you’ll find a lot to like about Phillips 66. Its refining and marketing operations feature 15 refineries with a net capacity of 2.2 million barrels of crude oil daily, 10,000 branded gas stations and marketing outlets, and 15,000 miles of pipeline systems.
Phillips 66 also owns 50% of DCP Midstream LLC, a joint venture with Spectra Energy (NYSE: SE). The business is one of the biggest natural gas producers and processors in the U.S. It currently has $4 billion in projects underway, and expects that up to another $2 billion may be around the corner. If that’s not enough diversification for you, the company also operates in chemicals, with a 50% interest in Chevron Phillips Chemical, a top global chemical company with more than 30 billion pounds of processing capacity.
The company is performing well, too, boasting a 92% global refinery utilization rate that tops most of its peers. In its recently reported second quarter, income rose 13%, partly due to higher profit margins on fuel. Its profit margins have been rising, too, from about 1% to 8% over the past few years.
The company has a geographical advantage, as well, as my colleague Jacob Roche explained a few months ago:
The majority of Phillips 66's refineries are based in the mid-continental region, close to the important Cushing, Okla., storage facility where the price of West Texas intermediate (WTI) oil is set. Because of its higher quality, WTI oil has tended to carry a premium when compared to Brent oil. But because of a massive oversupply, it currently trades $13 per barrel cheaper, giving refineries that have access to it a strong cost advantage. Phillips also plans to extend rail lines to different shale oil plays, giving it further access to cheap feedstocks.
The company has refineries across the country, though, and is able to process all kinds of crude oil, giving it flexibility.
Looking for income from your investments? Phillips 66 sports a dividend that recently yielded 2%.
The stock’s valuation is another draw for many. Its price-to-earnings (P/E) ratio was recently just 5.3. Its forward P/E is just 8, compared with 13 for the S&P 500 overall. Its price-to-book, price-to-sales, and price-to-cash-flow ratios are all well below industry averages.
The company isn’t standing still, either -- it plans to beef up its pipeline capacity and its fracking capacity, as well, while extending rail lines to shale fields. It’s also looking to buy back up to $1 billion worth of shares, which can boost the value of shareholders’ positions, as long as the purchased shares are not overpriced.
Sell
I don’t see a whole lot of reasons to consider selling this stock. But one consideration is the price of oil. As the price has fallen this past year, that has benefited refiners. If you expect the price of oil to rise, you might want to recalculate.
Hold (off)
Given the reasons to buy or sell Phillips 66, it's not unreasonable to decide to just hold off. You might want to wait for an even lower entry price, for example-- the stock is, after all, near a 52-week high. That’s not the best way to think about it, though, as stocks that keep rising will keep hitting 52-week highs, and fallen stocks can keep falling. It’s more important to assess the company’s strengths, health, competitive position, and growth potential.
You might also want to look at some of Phillips 66’s peers. Valero Energy (NYSE: VLO), for example, sports a P/E near 10, and a dividend yield of 2.5%, but it has been struggling recently, and has shut down an Aruba refinery, which PetroChina may buy. Smaller player HollyFrontier (NYSE: HFC) has a P/E of 6 and a yield of 1.6%. It also has some geographical advantages, like Phillips.
The verdict
I’m holding off on Phillips 66 for now but, overall, it looks rather attractive. Still, there are plenty of compelling stocks out there. Everyone's investment calculations are different. Do your own digging and see what you think.
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