Phillips 66 - Disciplined Company, But No Upside Left

Jun.16.13 | About: Phillips 66 (PSX)

Philips 66 (NYSE:PSX) has had a good run since being spun off in 2012. The stock is up 90% over the past 12 months, vs. 22% for the S&P 500. A year ago I suggested then that Philips 66 had substantial upside, as spin-offs often do. Now, the stock is far closer to its fair value.

A year on from the spin-off, I redid the sum of the parts valuation analysis and found that Philips 66 is worth more, at $62 per share vs. $49 a year ago on a fundamental sum of the parts basis (see below). However, there is no longer upside given the substantial move up in the stock price. The increased valuation is primarily because the market is willing to pay higher multiples for chemical businesses than a year ago, and to a lesser extent, because Philips 66 has bought back shares and paid down debt with free cashflow, somewhat offset by a rise in corporate costs.

As a result, there is no reason to rush to own Philips 66 since it is reasonably valued. I continue to hold it personally given management's capital discipline, but it is worth remembering the volatility in refining margins and that this relatively benign period in refining will ultimately end given the inherent cyclicality. Therefore, when I find a better opportunity, I will exit Phillips 66.

As a sanity check, the stock is now trading at 1.9x book which does suggest some downside risk despite the attractive P/E of 8.3x and 2% dividend yield.

My sum of the parts is below, representing 3% downside to the current price. This suggests that the most probable outcome is that we should not expect Philips 66's performance to diverge materially from the broader stock market in the coming months.

Sum Of The Parts For Phillips 66



Peer earnings multiple and comparables used

Minority Discount




23x [Westlake Chemical (NYSE:WLK), LyondellBasell (NYSE:LYB), Dow Chemical (NYSE:DOW)]





24x [ONEOK(NYSE:OKE), Enterprise Product Partners (NYSE:EPD)]



DCP (12.3% stake)

Listed so taking market value ($3.9B market cap)




7.8x [Exxon (NYSE:XOM), Marathon (NYSE:MPC), Tesoro (NYSE:TSO), Valero (NYSE:VLO)]





7.8x [Exxon XOM, Marathon , Tesoro TSO, Valero ]



Corporate costs $434M 11.4x (weighted average of the above) 0% ($4.9)


Book Value Per Income Statement


Equity Value


Value per share


Click to enlarge

Disclosure: I am long PSX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.