Will Phillips 66 Stock Recover?

Even for savvy investors, the energy sector has the feel of a maze to it given the complexities of drilling and refining, but every once in a while a company emerges that offers a clear path to value.

Phillips 66 (NYSE:PSX), which is a giant in refining, midstream, and petrochemicals, has seemingly created a business model that is less susceptible to the notorious volatility in the industry.

While fluctuating oil prices are the bane of many an energy investor, PSX has created a fortress-like balance sheet that few competitors can rival.

Add in a generous dividend yield and strong buyback program, and you can quickly see a lot to like in this energy sector gem.

The Journey for Phillips 66 Has Been Turbulent

Phillips 66 has a nearly 150-year history of experience in the energy business. The company engages in the energy manufacturing and logistics business across a host of segments from Refining, Midstream, Chemicals, and Marketing and what it calls Specialties.

It was spun off from ConocoPhillips (NYSE:COP) in 2012, prior to which it operated as ConocoPhillips’ downstream business. Since then, management has pursued ambitious infrastructure projects that collectively have returned $29 billion to shareholders.

Nevertheless, the bottom line adjusted earnings have been topsy turvy over the years. In 2019, the figure stood at $3.66 billion but the chaotic 2020 period led to a loss of $382 million.

Soon it bounced back and quickly recorded adjusted earnings of $2.52 billion in 2021 followed by a quadrupling to $8.90 billion in 2022.

However, last year, adjusted earnings slid somewhat to $7.16 billion against a somewhat weaker economic backdrop.

How are Phillips 66’s Fundamentals Doing Currently?

Most recently, Phillips 66 earnings slid to just $346 million from the prior year’s period of $2.1 billion in line as revenues tumbled 10.4% year-over-year to $35.5 billion. 

The midstream segment had the largest impact on the company’s bottom line, accounting for 76.5% in the last reported quarter.

The downward slide had already been evident in Q2 when Phillips 66’s midstream NGL fractionated volumes went from 679 mbd in Q1 to 744 mbd. This, in turn, led to a 22.8% sequential increase in adjusted earnings from the midstream segment to $753 million.

On a more positive note, the business did report higher margins in its chemical segment. Adjusted earnings in this segment grew by 8.3% from the prior quarter to $222 million. Aligning with Phillips 66’s wish to be more sustainable, it started reporting its renewable fuels segment separately, although it is showing losses as of the last reported quarter.

Phillips 66’s price is sitting at 14.39x its forward non-GAAP earnings; while it is a little bit higher than the industry average, it is significantly lower than its own five-year average of 110.88x. 

PSX Acquisitions Have Been Plentiful

Remarkably, ten years ago PSX reported revenues of $146 billion and last year that figure was just $1 billion higher in spite of numerous acquisitions.

For instance, in 2000, Phillips 66 formed a joint venture with Chevron U.S.A. Inc. to form Chevron Phillips Chemical (more commonly known as CPChem), which is a petrochemical company.

Last year, CPChem announced two world-class projects to grow its chemical output: an $8.5 billion integrated polymers facility along the U.S. Gulf Coast and a $6 billion integrated olefins and polyethylene complex in Ras Laffan Industrial City in Qatar. 

Last year was also quite notable for another major development when Phillips 66 completed its much-anticipated acquisition of DCP Midstream, LP. When the deal was announced in 2022, it was done in exchange for its stake in the Grey Oak Pipeline. The midstream business bolstering continued in 2024 as well.

In May, Phillips 66 unveiled its agreement to acquire Pinnacle Midland Parent LLC from private equity firm Energy Spectrum Capital for a cash consideration of $550 million. This deal is set to strengthen the company’s position in the Midland basin.

Pinnacle counts the recently built Dos Picos natural gas gathering and processing system, which is scalable toward a second 220 MMcf/d gas plant for Phillips 66 and is complementary to the company’s downstream business.

Aligning with management’s move toward greater sustainability, Phillips 66 transformed its San Francisco refinery, which produced only gasoline and jet fuels, to manufacture only renewable fuels now.

So what does it all mean for PSX share price?

Will PSX Stock Recover?

PSX stock has been in a technical downtrend since May 2024 and is unlikely to recover until it breaks resistance at $136 per share.

There are bullish tailwinds for investors, not least in the form of an aggressive management share repurchase program in addition to a rising dividend over the past 13 years.

For conservative-minded traders, an attractive aspect of the stock is its pattern of low volatility but that may not be enough to compel a purchase now given that fair value on a discounted cash flow basis sits at $132 per share.

Analysts are only mildly more bullish with a consensus price target of $141.95 among the 18 who cover the stock. In fact, sentiment has been on a downward decline among analysts, 12 of whom have revised their earnings estimates lower for the company.

Perhaps that’s not entirely a surprise given the fairly weak gross margins of 13.1% that make it ever harder to squeeze out profitability from the massive revenues produced. 

When you put the fundamentals and technicals into the mix, it’s hard to see a catalyst sparking higher prices anytime soon.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.