As Phillips 66 (PSX) emerges a public company after the ConocoPhillips (COP) spin off and starts presenting on the conferencing circuit various catalysts are emerging that may help unlock upside in the stock or hurt performance. The most favorable is the formation of a MLP for transportation and logistics assets, which may help give transparency to those assets to investors. There is also a chance of increased pipeline investment before the end of the year, as a short term drain on cash, this is less likely to help the share price in the near term. On a longer term view, Phillips 66 may look to buy out joint venture partners, but it doesn't appear to have the liquidity to do that for at least the next few years, these may be a positive for the share price by removing a lack of control premium on those assets, given that control is shared with a partner.
Optimizing The Portfolio
Phillips 66 have stated repeated their goal of optimizing their portfolio, most recently at the UBS Oil and Gas Conference last week (May 24, 2012) where they presented the slide below. In practice this means two things (1) divesting elements of their refining business as they did by selling the Trainer refinery to Delta Airlines (DAL) earlier this month (2) investing more in chemicals and midstream assets.
Source: Phillips 66 investor relations
Option 1 - Increased Pipeline Investment
"There are another $2 billion of pipeline investments that we're pursuing, you may see announcements about over the next three to six months or so." This could be a use of the cash that's already of Phillips 66 balance sheet, however they have also mentioned that they need this cash as a cushion of the volatility inherent in refining.
Option 2 - Formation of An MLP For Transportation and Logistics Assets
Currently, Phillips 66 midstream assets may not be recognized at full value by the market and forming an MLP may help realize that value. This could be a significant positive, because as I argue here Phillips 66 is at a significant discount to fair value and this transaction may highlight the value. Phillips 66 already has a 13% in DCP Midstream Partners (DPM) so this is familiar territory for them.
Option 3 - Buy Out of Spectra's (SE) Midstream JV
I estimate their midstream business may be worth in the region of $8B and therefore buying out Spectra's portion would be approximately $4B. It is unlikely Phillips 66 have the liquidity for this in the near term, but increasing there stake over time is a clear possibility. Were this to happen much of the share price reaction would depend on the realized price, anything less than $4B paid would be a positive in my view.
Option 4 - Buy Out of Chevron (CVX) Chemicals JV
I estimate the value of the chemicals business might be $10B, so even larger than the midstream JV, and a similar liquidity issue occurs. However, as with midstream, increasing Phillips 66 exposure to the business is a stated goal and this is one means of achieving it. Were this to happen much of the share price reaction would depend on the realized price, anything less than $5B would be a positive in my view.
And The Dividend Should Start At $0.20/share in July-September 2012
At the conference the $0.20/share divided was confirmed, "We'll initiate that in the third quarter." and that "We've suggested the idea of a 5 percent or better [dividend] increase." More details on the dividend are here.
|Option||Likelihood||Share price impact|
|Dividend commencement||Certain in Q3||Very Mild Positive (not new news)|
|Increased pipeline investment||Probable before end of 2012||Mixed to Negative (drain on cash)|
|MLP Formation||Possible in next 12 months||Positive (greater transparency on value)|
|Midstream JV Buyout||Unlikely in next 2 years||TBD (price dependent)|
|Chemicals JV Buyout||Unlikely in next 2 years||TBD (price dependent)|
It will be interesting to watch Phillips 66's moves over the coming months to determine whether their actions match their stated shareholder friendly goals, and enable the value in the stock to be realized. The formation of an MLP may be the most favorable action they can take in the near term to showcase the value of their transportation and logistics assets.