Seeking Alpha
Value, growth, hedge fund analyst
Profile| Send Message|
( followers)  

With the growing worldwide demand of LPG, including propane and butane, Phillips 66 (PSX) is focusing on export opportunities for its midstream-segment production. The company is planning to strengthen its midstream segment after witnessing a strong earnings improvement of more than 60% in the last quarter. To continue funding midstream export opportunities, the company invested $1.4 billion in that segment, which consists of transportation and natural gas liquid, or NGL, operations.

The capital funding will be used to build an export terminal in the U.S. Gulf Coast. This export terminal will complement the company's marine terminal in Freeport, Texas, and it is expected to strengthen its operational efficiency by using existing transportation and storage infrastructure. During the third quarter, total export from its existing terminal was 190,000 barrels per day. With the new export terminal, the company is expected to be able to export 100,000 barrels of NGL fractionator per day and 4.4 million barrels of liquefied petroleum gas per month by 2016.

In the NGL market, the fractionator is used to separate the various components such as methane, propane, and butane from the natural gas. These components are used largely for heating. Apart from heating, low-cost propane is enjoying growth in the engine-fuel segment, as the crude oil, diesel, and gasoline fuel prices continue to remain high. By 2020, propane-vehicle sales should be around 40,000 worldwide.

Total propane exported by the U.S. in 2012 grew to 2.6 billion gallons. As demand for this gas is growing rapidly, the petrochemical industry is focusing more on propane production in the U.S. It is expected that by 2018, total export of propane will be 16.8 billion gallons. This proposed terminal construction work will be started from the first half of 2014 and will be in operation by mid-2016.

The expected amount of NGL propane exported in the coming years, will impact the midstream industry in the U.S, including Phillips 66 in Freeport. Looking at the demand growth in Asia, Europe, and Latin America in coming years, Phillips 66 is expected to strengthen its midstream segment with its existing and new proposed export terminals.

In line to meet the demand of NGL propane and butane export, Enterprise Products Partners LP (EPD) also decided to build its export terminal in the U.S Gulf Coast. This export terminal will be for loading low-ethane propane and butane on to the vessels. The terminal is expected to start service in the fourth quarter of 2015. Once complete, it will complement the existing export terminal on the Houston Ship Channel and be able to achieve capacity of 15 million to 16 million barrels per month of low-ethane propane and butane. The export terminal will have a dedicated pipeline for supplying LPG to its fractionation and storage premises in Mont Belvieu, Texas.

Focus on chemical segment:

Along with the midstream segment, Phillips 66 is also focusing on its chemical segment. This segment has increased earnings to $81 million, growing 45% quarter-over-quarter. To continue with the improvement in this segment, the company will spend $1 billion in capital investment in 2014 for its share in CPChem, a 50-50 joint venture it has with Chevron (CVX).

The joint venture is expected to spend additional self-funded capital of $6 billion to $8 billion in the next four years. With the approval of its petrochemical project in the U.S. Gulf coast, it will build two polyethylene units with an annual capacity of 500,000 metric tons each, and one ethane cracker unit with an annual capacity of 1.5 million metric ton. Moreover, CPChem also is planning a 1-hexene plant in Bayton, Texas, with the capacity of 550 million pounds per year. This project is expected to start in the first half of 2014.

As a major ethylene producer, Phillips 66's CPChem will strengthen its chemical segment, as the global demand of polyethylene is expected to touch 216 billion pounds by 2017, representing an annual growth of 5% from 2012 to 2017.

Share Buyback

Apart from its huge capital investment in its midstream and chemical segments, Phillips 66 also initiated a share-buyback program of $2 billion. It is the continuation of the earlier $5 billion share-buyback program started in third quarter of 2012. As of October, the company has already repurchased $2 billion worth of shares. Presently the company has 599.54 million of outstanding shares, and I expect it will continue with the pace of earlier share buybacks in the next few years, with earnings per share, or EPS, increasing accordingly.

Conclusion

The overseas demand of propane and butane will positively affect future export, and Phillips 66 is expected to capitalize on it with its existing and proposed export terminal in the U.S Gulf Coast. The capital investment in its chemical segment is also expected to strengthen its cash flow. Export opportunities and strengthening cash flow, as well as the company's ongoing share buyback program and expected higher EPS, are compelling reasons for investors to consider Phillips 66 in their portfolio.

Source: Phillips 66: Investment That Will Pay Off