Phillips 66 (PSX) looks like one of the more compelling investments in the oil and gas industry. The company operates in the following four segments: Refining, Marketing and Specialties, Midstream and Chemicals. Refining comprised 65.5% of the company's net income in the first quarter. Marketing and Specialties, which was separated from the Refining segment, comprised 13.4% of net sales. The Midstream segment which comprised 7.8% of net income in the first quarter includes the company's 50% equity investment in DCP Midstream. The Chemicals segment, which comprised 20% of net income in the first quarter, includes the company's 50% investment in CPChem. Phillips 66 is well-positioned to benefit from the growth in U.S. oil, natural gas and NGL production.
Phillips 66 beat its earnings estimates for Q1 2013 by 16% (EPS of $2.19 vs. an estimate of $1.88). The increase in earnings was primarily due to improved results from the Refining and Marketing segments. Specifically, higher refining and marketing margins contributed to the gains. The Chemicals segment also contributed to higher earnings as ethylene, polyethylene and benzene margins were higher. The company generated $1.8 million in cash from operations during the quarter.
Shareholders were rewarded with $576 million in dividends and share repurchases during the first quarter. The trailing annual dividend yield was 1.3%, with the forward annual dividend is 2%. The company has a 7% payout ratio.
Phillips 66 currently has an attractive valuation with a trailing PE ratio of 9.7, a forward PE ratio of 8.7, a PEG of 0.73, and a price to book ratio of 1.8. Numbers like that clearly indicate an undervaluation. This positions the company well for future stock price increases.
The company is expected to grow earnings annually at 10.78% for the next five years. If this earnings growth is met or exceeded, the current stock price of $60 should easily increase to over $100 in five years. Since the company is undervalued, the stock could perform even better than that. It is also important to note the positive effect that the dividend could have for the investment. If an investor purchased $10,000 worth of PSX and reinvested the dividends, the investment is likely to be worth over $18,000 in five years.
Be aware that Phillips 66 is exposed to changes in commodity prices, refining margins and petrochemical margins. Since the company purchases the crude oil that it processes, its costs depend on the price of this fluctuating commodity. Unexpected crude oil supply disruptions could significantly raise costs for the company.
Phillips 66 looks more compelling than other energy related companies as an investment. Exxon Mobil (XOM) is only expected to grow earnings annually at 1.81% for the next five years. In the past five years, Exxon Mobil lagged the market because it only grew earnings by about 5% annually. Therefore, XOM is likely to continue lagging the market if its earnings growth is expected to be even lower for the next five years.
Even ConocoPhillips (COP), the company where Phillips 66 was split from, is only expected to grow earnings annually at about 4% for the next five years. Although COP's stock price may also lag the market in the next five years, the company pays an attractive dividend of 4.4%. ConocoPhillips does have an attractive valuation with a trailing and forward PE ratio of about 10. However, the combined yield plus earnings growth only provides a CAGR of 8.4% as compared to PSX's potential CAGR of about 12.8%.
Given the undervaluation, dividend payments and above average expected earnings growth, I expect Phillips 66 to be one of the better energy investments for at least the next five years.