PSX: Gauge Analysis (updated March 1, 2021)

I have analyzed Phillips 66's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis uses gauges to assess how well the company satisfies seven specific investment criteria.  GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied.  An Overall Score between zero and 100, which takes all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms.  An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.

First, a quick review of the company itself.

Phillips 66 is an energy company with refining, midstream, downstream, and chemical operations. The company's roots go back to the merger between the independent Phillips Petroleum company and Conoco in 2002.  Ten years later, ConocoPhillips decided it would focus on exploration and production, and it spun off the rest of its businesses as a separate company, which it named after the iconic "Phillips 66" brand.  Phillips 66 operates refineries for converting crude oil (and, eventually, more eco-friendly oils) into gasoline and other fuels, which are sold at branded gas stations and other outlets.  The company's chemicals business is a 50 percent share of Chevron Phillips Chemicals Company.  Phillips 66 also has a significant interest in the pipelines and terminals that bring energy products to the company's refineries by owning 76 percent of Phillips 66 Partners (a master limited partnership). The environmental impact of one of the partnership's assets, its 25-percent stake in the Dakota Access pipeline, is being scrutinized carefully and could be shut down.  Phillips 66 (the corporation) is now considering options for Phillips 66 Partners, which could include "a merger, reorganization, consolidation or other take-private transaction ... or other material changes to the Partnership’s business or capital or governance structure."

Phillips incurred a loss of $4 billion, $9.05 per share, on revenue of $64 billion during the last 12 months.  In the quarter that ended on December 31, 2020, Phillips lost $1.23 per share on a GAAP basis, and it lost $1.15 per share after non-GAAP adjustments and exclusions.  See Phillips's most recent quarterly report and my review of their results relative to expectations for additional information.

Shares of Phillips now trade for about $83 each, giving the company a market value of $36 billion. These shares can be found in the Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.

Analysis Results:

Phillips's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments.

1. The Company's Size is Substantial: GREEN

    Market Value: $36.5 billion (large cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.4 (>2.0 is conservative)

    Long-term debt/Working Capital = 397% (<150% is conservative)

3. The Company Generates Stable Earnings: RED

    Sixteen positive quarterly earnings reports in last 5 years (worrisome)

    Earnings variability = 123% (very high)

4. The Company Exhibits Earnings Growth: RED

    Owner Earnings growth rate (trailing year) = N/A 

    Owner Earnings growth rate (five-year average) = N/A 

    Free Cash Flow growth rate (trailing year) = N/A 

    Free Cash Flow growth rate (five-year average) =  N/A

5. The Company is Efficiently Profitable: RED

    Cash Flow Return On Invested Capital = 6% (so-so)

    Operating Profit/Sales = N/A (excellent)

6. The Company Pays a Healthy Dividend: YELLOW

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 11% (good)

    Dividend = N/A of last year's FCF 

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = N/A 

    Price/GAAP Earnings (five-year average) = 18.4 (moderate to pricey)

    Free Cash Flow/Market Value = -2.2% (not acceptable, less than the five-year average of 2.9%)

    Acquirer's Multiple = 999.0 (very expensive)

    Price/Book Value = 1.7 (about the same as its five-year average)

    Price/Sales = 0.6 (about the same as its five-year average)

In summary, the analysis assigned Phillips 66 one GREEN, one YELLOW, and five RED grades.  The resulting Overall Score is 13 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, Phillips does not satisfy the GCFR criteria for investment consideration at this time.

The Overall Score would only increase to 21 points if the share price were to fall by 50 percent, from $83.05 to $41.38, all else being equal. It is also possible that Phillips's future results will push the score up (or pull it down).  Revisit GCFR2 (https://gcfr2.com) occasionally for updates on Phillips's performance and the latest GCFR gauges and scores.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

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 #phillips    #psx    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

PSX: Earnings Report for the Quarter Ending December 31, 2020

Phillips 66 reported before the market opened on January 29, 2021, it lost $1.23 per diluted share in the quarter that ended on December 31, 2020, down from earnings of $1.64 in the same 3 months of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Adjusted earnings, a non-GAAP figure, fell to ($1.15) per share from $1.54 one year earlier. The principal exclusions contributing to the $0.08 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Impairments [$0.22 per share], inventory adjustments [($0.06) per share], and Tax impacts [($0.12) per share].  Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's principal, ongoing operations, are intended to be cleaner measures of corporate profits.

This post compares the quarterly Income Statement published by Phillips to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by Phillips's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  Phillips 66 is an energy company with refining, midstream, downstream, and chemical operations. An independent for decades, Phillips Petroleum merged with Conoco in 2002 to form the giant ConocoPhillips. Phillips became independent again in 2012 -- this time with the iconic "Phillips 66" brand as the company name -- when it was spun off from ConocoPhillips.  Phillips 66 operates refineries for converting crude oil into gasoline and other fuels; the company's San Francisco refinery is being transformed to process renewable oils, instead of crude oil.  The company's products are sold by a large number of branded gas stations and other outlets.  Through the Phillips 66 Partners master limited partnership, Phillips 66 also owns pipelines and terminals for transporting energy products between processing plants and storage facilities.   The company's chemicals business is a 50 percent share of Chevron Phillips Chemicals Company.

The following table is a simplified version of Phillips's Income Statement for the quarter that ended in December 2020, with company-reported numbers along side my predictions.  Figures from the year-earlier quarter are also provided for comparative purposes.

PSX: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for Phillips 66's earnings for fiscal 2020's fourth quarter, which ended on December 31, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between. 

Once the company’s official results become available on January 29, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before we get into the details, let's take a step back and start with background information about Phillips 66.

Phillips 66 is an energy company with refining, midstream, downstream, and chemical operations. An independent for decades, Phillips Petroleum merged with Conoco in 2002 to form the giant ConocoPhillips. Phillips became independent again in 2012 -- this time with the iconic "Phillips 66" brand as the company name -- when it was spun off from ConocoPhillips.  Phillips 66 operates refineries for converting crude oil into gasoline and other fuels; the company's San Francisco refinery is being transformed to process renewable oils, instead of crude oil.  The company's products are sold by a large number of branded gas stations and other outlets.  Through the Phillips 66 Partners master limited partnership, Phillips 66 also owns pipelines and terminals for transporting energy products between processing plants and storage facilities.  The company's chemicals business is a 50 percent share of Chevron Phillips Chemicals Company.

Shares of Phillips 66 now trade for about $72 each, giving the company a market value of $32 billion. These shares can be found in the Standard and Poors 500, New York Stock Exchange Composite, and Russell 1000 stock indices.

Phillips 66 incurred a loss of $3 billion on revenue of $77 billion during the last year. In the quarter that ended on 30 September 2020, Phillips essentially broke even (excluding certain items), which significantly beat the minus $0.80 per share Wall Street consensus forecast. See https://tinyurl.com/y25p7m47 for Phillips's most recent quarterly report.

Revenue in the September 2020 quarter totaled $15.9 billion, 41 percent less than last year's $27.2 billion. The Refined petroleum products business was responsible for 79 percent of overall revenue, and this unit's revenue percent fell by 43.8 percent compared to the year-earlier result. The Crude oil resales business contributed 14 percent of revenue, and this unit's revenue decreased by 37.4 percent. The Natural gas liquids unit supplied 6 percent of revenue, and the value fell by 5.8 percent

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

Phillips 66 management described their expectations for the fourth quarter of 2020 in October after they last reported quarterly results.

In Chemicals, we expect the fourth-quarter global O&P utilization rate to be in the mid-90s. In Refining, crude utilization will be adjusted according to market conditions. In October, utilization has been in the mid-60% range, impacted by downtime at the Lake Charles and Alliance refineries. We expect fourth-quarter pre-tax turnaround expenses to be between $80 million and $100 million. We anticipate fourth- quarter Corporate and Other costs to come in between $220 million and $230 million pre-tax.

The guidance lacks the kind of details I need to prepare an earnings estimate.  But, it is noteworthy that refinery utilization was lower than normal in October because that suggests revenue and operating margins won't be as high as they might have been.  The expense estimates are within normal ranges.

To estimate revenue and the cost of goods sold (which I define as the sum of purchased crude oil and operating expenses), I examined how these figures at Phillips 66 have historically varied with the price of oil, gasoline, and other fuels. I then input the prices of these commodities during the fourth quarter of 2020, as published by the EIA.  This approach yielded a revenue estimate of $17.1 billion and a CGS estimate of $16.3 billion.  Finally, I backed these numbers down to $16.7 billion and $16.0 billion to reflect the lower refinery utilization rate mentioned above.

For the other lines on the Income Statement, I tried to choose values that were consistent with the company's historical results.  I'm more confident in some numbers than others.

The resulting estimate for Net Income is $100 million ($0.23 per share).

The following Income Statement summarizes the estimates made as discussed above. 

Please note that my organization of revenues, expenses, gains, and losses, which I use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

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