Phillips 66 Earnings: Earnings Fall on Weaker Refining Margins, Partially Offset by DCP Acquisition

Phillips 66 PSX reported second-quarter adjusted earnings of $1.8 billion, compared with $3.3 billion a year ago. The decrease was largely due to weaker refining earnings as a result of lower refining margins, but was aided by stronger midstream earnings from the completed acquisition of DCP Midstream.

Hurt by weaker market conditions, the refining segment decreased adjusted earnings to $1.2 billion from $3.2 billion a year ago on a decrease in realized margins to $15.32/barrel, from $28.62/bbl a year ago. This was offset by an improved capture rate, rebounding to 93%, after falling to 90% during the first quarter of 2023.

The company repurchased $1.3 billion in shares during the quarter and paid $474 million in dividends. Since July 2022, shareholder return has amounted to $5.4 billion with plans to return $10 billion-$12 billion in total by year-end 2024. The company also completed their $3.8 billion acquisition of all publicly shares of DCP Midstream, bringing their net debt-to-capital ratio to 35%, on the higher end of the industry. Managements reiterated their belief this will provide an incremental $1 billion of adjusted EBITDA and added they now expect to capture over $400 million of commercial and operating synergies by 2025. The company has also announced they have implemented $750 million of run-rate savings initiatives, which includes $200 million of sustaining capital efficiencies, in order to complete their plan to deliver $1 billion in savings by the end of 2023.

Given its diversified portfolio, Phillips 66 shares have held up better than pure-play refining peers during the last half year as refining margins, have weakened. However, they lagged more recently as refining margins have improved. Phillips 66 management made similar comments to other refiner management teams that demand remains relatively strong and reduced supply could improve distillate margins from current levels.