Phillips 66 (PSX) is up over 23% year-to-date and more than 38% in the last twelve months. Despite shrinking margins in the sector and poor performance, the increase in price is extremely impressive for the company. Recently, the company reported refining losses of about $2 million. However, the losses have not caused any fall in the stock price, and the stock is up over 9% in the past 30 days. So, what is making investors so optimistic about the company despite refining losses? Phillips 66 has three business segments: refining and marketing, midstream, and chemicals. Let's look at the positives which are causing the price to appreciate.
A Look at the Performance
Phillips 66 reported $0.87 per share in profits for the third quarter, less than the estimated $0.94 per share. The main reason for the decline in profits was a loss of $2 million from the refining segment. Shares of the company were up the day it reported its third quarter earnings despite missing the estimates. The main reason was the factors were not company specific - the global margins in the refining sector has been shrinking, which caused the refining segment to report losses.
On average worldwide crack spread or the difference between the crude oil and wholesale petroleum product prices has fallen by 40%. Furthermore, discount between Brent and West Texas Intermediate crude oil has also narrowed, which has resulted in poor performance of the American refineries. On the other hand, Phillips 66 reported profit of $262 million from chemicals segment. The decline in refining profits seems a temporary issue which should be resolved in the near future.
Insiders Buying More Shares
It is usually a good sign if the management or any other insider is buying the stock. Insiders at Phillips 66 has been buying shares - William Loomis, Director at Phillips 66, recently bought 7,760 shares at $64.42 per share. Loomis has also been buying Phillips 66 shares in the past - In May last year, he bought shares at $31.69 and then in January this year at $51.77. It is a substantial investment, and the insiders will not be putting that sort of money without any solid information. It looks like the company is set to have a better quarter than the previous one.
Looking at the Foreign Markets?
The company is looking to export chemicals to the Asian, Latin America and Europe. There is substantial demand for Propane and Butane in the above mentioned areas and the company is looking to exploit this demand. Phillips 66 is going to build a terminal at its existing site in Freeport and it will be capable of exporting 4.4 million barrels of fuel every month. At the moment, the company is in the process of obtaining permits for the facility, which should be in operation in 2016. At the moment, a number of companies are trying to benefit from the oil boom in the U.S. by exporting fuel and chemicals to Asia, Latin America, and other regions.
Will Phillips 66 Become a Dividend Stock?
Phillips 66 was spun-off from ConocoPhillips (COP), which has an impressive history of dividends. ConocoPhillips has been rewarding its shareholders generously, and Phillips 66 has followed in the footsteps of ConocoPhillips. At the moment, Phillips 66 pays quarterly dividend of $39 cents per share, which takes its dividend yield to 2.38%. The company started quarterly dividend at $20 cents per share, and in just over a year, it has increased dividend three times.
The ability to increase/maintain dividends is supported by the strong cash position of the company. In the last twelve months, the company has paid $4.5 billion in cash dividends and generated $6.45 billion in cash flows from operations. During the last quarter, the company generated $1.9 billion in cash flows from operations. So, the overall position of the cash flows and the history of the company indicate that Phillips 66 will continue to grow its dividends and soon it will become one of the best dividend payers in the market.
Phillips 66 is a solid investment in my opinion. The company will continue to grow its revenues, cash flows and dividends, which makes it an extremely attractive investment for both growth and income investors. I believe the investors are taking a long-term view and understand that the refining losses will soon abate and the growth in revenues will continue at a steady pace. Furthermore, the prospect of healthy growth in dividends is an added advantage.