Phillips 66 (NYSE:PSX) announced another fantastic quarter Wednesday morning. The company has been one of the biggest winners in the portfolio of our Dividend Growth portfolio.
Adjusted earnings per share jumped over 240% year-over-year to $2.06, smashing consensus estimates. Earnings for the year jumped 50% to $8.46, highlighting the considerable operating leverage inherent to the refinery business. Shares are now up over 90% since being spun off from ConocoPhillips (NYSE:COP) in 2012.
Cash flow generation was superb, as the firm raked in $1.3 billion in operating cash flow. $1 billion was used to reduce debt, leaving the firm with a debt/capital ratio of 25%. The firm also added $1 billion to its share repurchase program, and hiked its dividend 25% (it raised it to $1.25 per share for 2013) -- though that figure represents a yield of less than 2%, thanks to share appreciation during the past year. We love the firm's aggressive capital management policies, which have helped the company quickly reduce debt while providing strong returns of capital to shareholders.
Phillips 66 benefited tremendously from crude as a percentage of the mix (67% versus 57%), and shale oil processing, where barrels per day increased 97% from the same period a year ago. Refining and marketing earnings, adjusted for a large impairment in the company's Melaka Refinery, jumped 18% year-over-year to $1.1 billion, even though utilization was 300 basis points lower at 91%. Export volumes also helped boost earnings, jumping 5% compared to the prior year. Even while crack spreads declined 33% sequentially, refinery market capture increased to 95% (was 79%).
Midstream earnings weren't as strong, falling nearly 50% to $62 million on an adjusted basis. Lower natural gas prices weighed on earnings, and with a relatively warm winter and increasing supplies, we doubt the midstream segment will see a quick turnaround in profitability.
Chemical earnings surged over 150% to $246 million, as segment margins improved. Olefins and polymers volumes increased 8% year-over-year, and the company remains exposed to a favorable chemical mix.
While the company doesn't give specific financial guidance for 2013, we think the year features some strong fundamental catalysts. Phillips 66 will add additional refining export capacity, and it expects to refine 200,000 barrels per day of shale oil during 2013, well above its current run-rate of 112,000 barrels per day. We also expect the firm to file for a master limited partnership, which should hit the market in the second half of 2013.
Overall, we're feeling confident holding shares of Phillips 66 in the portfolio of our Dividend Growth Newsletter, and we could not be happier with the results of this spinoff. We see modest upside valuation from current levels, and we believe the company will continue its generous capital allocation strategies. Still, we may trim our position in the coming weeks given the huge price advance (as a measure of prudence).
Additional disclosure: COP and PSX are included in the portfolio of our Dividend Growth Newsletter.