Phillips 66 Earnings: Refining Drives Earnings Improvement, but Diversified Portfolio Holds Value

Phillips 66 PSX reported first-quarter earnings that exceeded market expectations as adjusted earnings increased to $2.0 billion compared with $595 million a year ago. The improvement was largely a result of much greater refining earnings with higher midstream and marketing earnings offsetting weaker chemical earnings.

Benefiting from strong market conditions, the refining segment increased adjusted earnings to $1.6 billion from $190 million a year ago on an increase in realized margins to $20.72/barrel, from $10.83/bbl a year ago. The capture rate also improved during the quarter, rebounding to 93%, after falling to 84% during fourth-quarter 2022.

The company repurchased $800 million in shares during the quarter and paid $486 million in dividends. Since July 2022, shareholder return has amounted to $3.7 billion with plans to return $10 billion-$12 billion in total by year-end 2024.

Given its diversified portfolio, Phillips 66 shares have held up better than pure plan refining peers during the last month as refining margins, particularly distillate, have weakened. That relative outperformance could continue if economic weakness weights on margins further. However, Phillips 66 management made similar comments as other refiner management teams that demand remains relatively strong and reduced supply could improve distillate margins from current levels. With our fair value estimate and narrow moat rating unchanged, we see shares as undervalued.

The company’s plans to deliver $3 billion in EBITDA growth by 2025 remain on track with delivery of $600 million of the targeted $1 billion in cost savings achieved at the end of the first quarter. Meanwhile, its roll-up of DCP midstream is progressing with the next step to acquire all the public units in the second quarter. The increased interest in DCP is expected to deliver incremental EBITDA of $1 billion.