Phillips 66 (PSX) is an energy manufacturer based in Houston. Its main operating segments are refining and marketing (R&M), midstream and chemicals. Its operations extend to about 10,000 branded marketing outlets worldwide, with 15,000 miles of pipe systems and a net crude oil capacity of 2.2 million barrels per day. One of the strongest advantages of Phillips 66 comes from its partnership with DCP Midstream, LLC, a giant international natural gas gatherer and processor that basically caters to the United States market and holds a natural gas processing capacity of 7.2 billion cubic feet per day. Several top investors initiated a position in the stock. For example, Warren Buffett, Jean Marie Eveillard, Michael Price, Mario Gabelli, Chris Davis and James Barrow started a position in the stock. I learned about PSX from a buy alert in Warren Trades blog.
Phillips 66 has a strong portfolio of assets and increasing growth. In its most recent earnings report, the firm reported an operating cash flow of $1.4 billion, which makes it one of the most profitable firms in the energy industry today. Philips 66 is an independent refiner, which means that it does not produce oil or explore for natural gas, the company just focuses on refining activities. Unlike other oil companies, this company mainly focuses on the refinement of oil products so it does not burn up its assets over expensive explorations. Philips 66 management pursues a business strategy that has the goal of improving returns in its R&M segment and enhance shareholder value through dividend growth, debt reduction and share repurchases.
What is most encouraging is that PSX plans to use its free cash flow of ~$2B/year to boost its dividend yield above the peer average and reduce its net debt ratio below the peer average. Since its May 1 spinoff, Phillips 66 has led U.S. refiners in a rally rooted in increased U.S. crude output, which has depressed prices and allowed the companies to save on every barrel they process. According to Bloomberg, the margin between crude costs and the prices at which refiners sell fuel on the U.S. Gulf Coast averaged $12.71 a barrel in the July-to-September period, the most since 2005 and a 69 percent increase over the same period last year.
According to a recent report, Citigroup believes that the rapid expansion of Phillips 66 comes from its recent chemical joint venture with Chevron Corp. (CVX), one of the largest multinational energy corporations investing in natural gas and marketing of geothermal energy worldwide. Aside from its partnership with Chevron, the firm also entered into another venture with Spectra Energy Corp.(SE), another giant in the natural gas industry. Philips 66's refining portfolio grew an impressive 93% during the second quarter of this year. The company also reported a strong dividend growth of 25%. To take full advantage of its positive results, Phillips 66 authorized a $1 billion buyback plan. The repurchase plan is also one of the company's ways of demonstrating its commitment to strong and growing shareholder distributions.
PSX competes against BP (BP), Marathon Petroleum (MPC), Murphy Oil (MUR), CVR Energy (CVR) and HollyFrontier (HFC), among other energy companies. Despite PSX's high growth and increased dividends, its shares are still inexpensive. For example, PSX trades at just 6.14x P/E, 1.31x P/B and 0.15 P/S while BP trades at 7.8x P/E and 0.35x P/S. Marathon trades at a book multiple of 2.09x and 0.24x sales while it is growing half the growth rate of PSX. In the case of CVI, the stock trades at 10x P/E, 2.77x book and 0.63x sales. Those multiples are almost double those of PSX. Philips 66 is one of the most inexpensive stocks in its group but its growth rates and fundamentals are not in sync with that undervaluation.
In conclusion, I think that PSX is a non-followed energy stock that offers investors strong fundamentals, future earnings and dividend growth plus a management team that is shareholder oriented. I think that Warren Buffett made a great decision by buying PSX at its IPO price of $32.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PSX over the next 72 hours.