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This article builds on the earnings, book and yield valuations in part 1 to arrive at a overall valuation for Phillips 66 (NYSE:PSX) of $46, 45% above the current price.

Sum Of The Parts For Phillips 66

Segment

Earnings

Peer earnings multiple and comparables used

Minority Discount

Valuation

Chemicals

$716M

14x [Westlake Chemical (NYSE:WLK), LyondellBasell (NYSE:LYB), Dow Chemical (NYSE:DOW)]

30%

$7.1B

Midstream

$394M

22x [ONEOK(NYSE:OKE), Enterprise Product Partners (NYSE:EPD)]

30%

$6.1B

DCP (12.3% stake)

Listed so taking market value

$0.3B

Refining

$3.3B

7x [Exxon (NYSE:XOM), Marathon (NYSE:MPC), Tesoro (NYSE:TSO), Valero (NYSE:VLO)]

0%

$24.2B

Marketing

$0.5B

7x [Exxon XOM, Marathon (MPC), Tesoro TSO, Valero (VLO)]

0%

$3.6B

Corporate costs$192M10.5x (weighted average of the above)0%($2.0)

Debt

Pro Forma Value

($8B)

Equity Value

$31.2B

Value per share

$49

Notes on sum of the parts analysis - 2011 earnings are compared with the simple average multiples of peers to arrive at a valuation and then debt and corporate costs are subtracted.

Risk factors

  • Fundamental valuation requires patience; without a clear catalyst stocks can deviate from their fair value for long periods of time (assuming that the above is a reasonable assessment of fair value).
  • Phillips 66 is a new and untested company, this absence of a track record creates risk.
  • This analysis involves comparing PSX to peers, in order to close the gap to peers PSX could rise, but it's also possible that the peer companies could fall in value, which would achieve the same result.
  • Much of the valuation hinges on refining margins, which are volatile and the stock would likely trade down in a weak refining environment
  • Management has talked at length about creating shareholder value, however in both midstream and chemicals Phillips 66 has a 50% stake in the primary business with Spectra Energy (NYSE:SE) and Chevron (NYSE:CVX) respectively. There is a risk Phillips 66 overpays to obtain 100% of these businesses, given its stated plan to expand in these segments relative to refining.
  • Having recently spun out of Conoco Phillips, costs may rise due to the inability to leverage the shared infrastructure across a larger corporation.

Aggregate Valuation

Finally we weight the different valuation methods to arrive at a final aggregate valuation. For example dividend yield is relatively less reliable whereas earnings and book value are more robust.

Price targetWeight
Book$4630%
Earnings$5610%
Average Earnings$4430%
Dividend Yield$4010%
Sum of the parts$4920%
100%
Weighted average price target$46
Current price$32
Upside45%

Summary

Phillips 66 appears to have valuation support with the analysis above suggesting a price in the $40-$56 per share range, with estimates centering in the mid $40s. With the stock trading at $32 that suggests approximately 45% upside from current levels. However, refining margins remain the biggest uncertainty for the stock.

Phillips 66 published its most recently registration statement here, which provides the source material for this analysis.

Source: Phillips 66 Valuation Suggests 45% Upside - Part 2