Congratulations on an excellent analysis of Phillips 66 and how the company is taking advantage of the realized crack spread of over $26 for its mid-Continent Refineries to invest for the future in its higher ROCE Midstream and Chemical Business Segment.
Your observation that the $19 Brent-WTI differential has continued is very astute. Clayton Reasor, Phillips 66's senior vice president of strategy and corporate affairs, said in May, 2012 that the price spread between West Texas Intermediate crude and Brent crude futures was likely to narrow sharply in 2013 as increased domestic pipeline capacity relieved the glut created by new shale-oil supplies. However Phillips' decision in June to buy 2,000 railroad cars so they can start moving 120,000 barrels of oil a day from mid-continent to Phillips coastal refineries at Bayway and Ferndale implies that although the big spread was predicted to last for only another two or three more years, the recent increase in Bakken output may extend the high profitability of the mid-Continent refineries for several more years beyond that.
Phillips most profitable refinery, the old Marland Refinery at Ponca City, which earned over $500 million in profit for Phillips in 2011, is on track to earn in excess of $600 million in 2012.
Phillips 66: Favorable Refining Environment Makes This Stock A Favorite Value Play [View article]
Congratulations on an excellent analysis of Phillips 66 and how the company is taking advantage of the huge realized crack spread of over $26 for its mid-Continent Refineries to invest for the future in its higher ROCE Midstream and Chemical Business Segment.
The big question is how long the $19 Brent-WTI differentials will last. My guess is that although the big spread was predicted to last for only another two or three more years, until additional pipeline capacity comes on line in Cushing, the recent increase in Bakken output may extend the high profitability of the mid-Continent refineries for several more years beyond that.
I only have one small quibble with your article. The investment in Phillips 66 by Berkshire Hathaway doesn't actually represent an investment made by Buffett himself but was made by Berkshire investment managers Todd Combs or Ted Weschler. As Tim McAleenan wrote in Seeking Alpha on July 16, 2012, "it's a shame that some media outlets will report any Berkshire move as an action by Warren Buffett. In this case, it's wrong to assume that Buffett has been gobbling up shares of Phillips 66. To the extent that Buffett's moves affect your own investment calculus, extra diligence may be required in determining whether Buffett or his assistants are making a particular stock purchase. It's just a shame that sorting through prominent media misreporting is part of the process."
Read more about Phillips 66 with an independent assessment of the company's business strategy and execution at:
You may also want to read a financial analysis of Phillips most profitable refinery, the old Marland Refinery at Ponca City, which earned over $500 million in profit for Phillips in 2011 and is on track to earn in excess of $600 million in 2012 at:
Conoco And Phillips 66: Sum Of Parts Now Worth Less Than Whole [View article]
Congratulations on an excellent analysis of Phillips 66 and how they are undervalued because the street doesn't appreciate that their Midstream Business Segment had a ROCE of 30% last year while their Chemical Business Segment had a ROCE of 28% and that Phillips will be investing billions of dollars in both midstream and chemicals over the next few years years.
The only statement in your article that I would take issue with is that in the Refining and Marketing Business Segment "Phillips is working with razor thin margins, and in the volatile refining business that can be a dangerous thing."
Actually Phillips Refining and Marketing Business Segment had a ROCE of 12% last year and Phillips CEO Greg Garland stated at his presentation to the Citi Global Energy Conference on June 5 that his expectation was that Phillips could improve Phillips return on R&M to a 15% ROCE business over the cycle.
There are two ways Phillips is going to do this: First Phillips may be purchasing 2,000 railroad cars able to move 100,000 barrels of of shale related crudes per day which will let Phillips get advantaged crude from mid-continent to the front end of Phillips coastal refineries. Keep in mind that because of the glut of mid-continent oil that can't get of Cushing there is presently a big price advantage for mid-continent crude and this is expected to last for three to five years until additional pipeline capacity can be built to the coastal refineries. Garland says getting more advantaged crudes to coastal refineries will translate to about $500 million of annual net income to Phillips.
Second Phillips plans to increase yields in their refineries. Every one percent clean product yield is worth somewhere between $100 to $150 million of net income and Phillips is pretty comfortable they can eke out a couple more percentage points in clean product yields.
Read more about Phillips 66 with an independent assessment of the company's business strategy and execution at:
Congratulations on very excellent analysis of Phillips 66 and how they intend to implement their stated strategy of increasing their investment in the Chemical Business Segment and the Midstream Business Segment.
I agree that Phillips will be de-emphasizing the Refining and Marketing Business Segment and expect that they will have divested themselves of all but the highly profitable mid-continent refineries within three to five years.
If Phillips 66 anticipates such high ROCE in their chemical and midstream segments perhaps they should start to think of the company as a growth stock rather than a value stock and forgo the dividend altogether retaining the cash to help fund either the acquisition of Spectra's portion of the Midstream joint venture or to fund buying out Chevron's portion of the Chemical joint venture. It would be a gutsy move that would tell the street that they really believe in the growth possibilities of these two business segments.
Perhaps Greg Garland will be making an announcement on June 5, 2012 at the 2012 Citi Global Energy Conference with more detailed information on how the company plans to implement their strategy for growing chemical and midstream.
In the meantime, read more about Phillips 66 with an independent assessment of the company's business strategy and execution at:
ConocoPhillips And Phillips 66 Stand Apart From Peers [View article]
A very excellent analysis of Phillips 66. I agree that Phillips will be de-emphasizing the Refining and Marketing Business Segment and executing plans to make massive investments in the high COBE Midstream and Chemical Business Segments.
Regarding refining, the Alliance refinery is presently on the market per Garland's remarks to Reuters on May 1 but he won't "let the refinery go cheap." Bayway is another matter. Phillips 66 plans to keep the Bayway plant and its foothold in the East Coast refining market. "It's a good machine. It should be the last refinery standing in PADD I," says Garland. The mid-continent refineries are Phillips 66′s most profitable refining assets and won't be sold or closed for at least 3 to 5 years due to the bottleneck at Cushing that is keeping the price of high quality crudes in the Mid-Continent refineries low because there are no pipelines to carry them to world markets. However according to Clayton Reasor, Phillips 66's senior vice president of strategy and corporate affairs, at the UBS energy conference the price spread between West Texas Intermediate crude and Brent crude futures is likely to narrow sharply in 2013 as increased domestic pipeline capacity relieves the glut created by new shale-oil supplies.
Read more about Phillips 66 with an independent assessment of the company's business strategy and execution at:
Phillips 66: An S&P 500 Addition With Growth Prospects [View article]
While it is true that Phillips 66 plans to de-emphasize the Refining and Marketing Business Segment in coming years reducing the capital allocation to this segment from 80% to 50%, returns from R&M segment were good in 2011 with a 12% COBE. Although R&M is a cyclical business, returns in refining should remain high for the next three to five years due to the bottleneck at Cushing that is keeping the price of high quality crudes in the Mid-Continent refineries low because there are no pipelines to carry them to world markets. In the meantime Phillips is getting out of the refining business recently selling their Trainer refinery and putting their Alliance refinery on the market.
Read more about Phillips 66 with an independent assessment of the company's business strategy and execution at:
Phillips 66: An S&P 500 Addition With Growth Prospects [View article]
While it is true that Phillips 66 plans to de-emphasize the Refining and Marketing Business Segment in coming years reducing the capital allocation to this segment from 80% to 50%, returns from R&M segment were good in 2011 with a 12% COBE. Although R&M is a cyclical business, returns in refining should remain high for the next three to five years due to the bottleneck at Cushing that is keeping the price of high quality crudes in the Mid-Continent refineries low because there are no pipelines to carry them to world markets. In the meantime Phillips is getting out of the refining business recently selling their Trainer refinery and putting their Alliance refinery on the market.
Read more about Phillips 66 with an independent assessment of the company's business strategy and execution at:
Putting A Value On The Conoco / Phillips 66 Spinoff [View article]
The Phillips 66 Refining and Marketing Business Segment had a COBE of 12% in 2011 and should continue to have high margins in refining for the next three to five years due to the bottleneck at Cushing that is keeping the price of high quality crudes in the Mid-Continent refineries low because there are no pipelines to carry them to world markets. In the meantime Phillips is getting out of the refining business recently selling their Trainer refinery and putting their Alliance refinery on the market.
Phillips is making a $5 billion investment in its Chemicals Business Segment which has a COBE of 28% and there is a glut of low priced natural gas that feeds Phillips plants that should last for the next 4 to 5 years.
Read more about Phillips 66 with an independent assessment of the company's business strategy and execution at:
Phillips 66 Hits A Home Run [View article]
Your observation that the $19 Brent-WTI differential has continued is very astute. Clayton Reasor, Phillips 66's senior vice president of strategy and corporate affairs, said in May, 2012 that the price spread between West Texas Intermediate crude and Brent crude futures was likely to narrow sharply in 2013 as increased domestic pipeline capacity relieved the glut created by new shale-oil supplies. However Phillips' decision in June to buy 2,000 railroad cars so they can start moving 120,000 barrels of oil a day from mid-continent to Phillips coastal refineries at Bayway and Ferndale implies that although the big spread was predicted to last for only another two or three more years, the recent increase in Bakken output may extend the high profitability of the mid-Continent refineries for several more years beyond that.
Phillips most profitable refinery, the old Marland Refinery at Ponca City, which earned over $500 million in profit for Phillips in 2011, is on track to earn in excess of $600 million in 2012.
Phillips 66: Favorable Refining Environment Makes This Stock A Favorite Value Play [View article]
The big question is how long the $19 Brent-WTI differentials will last. My guess is that although the big spread was predicted to last for only another two or three more years, until additional pipeline capacity comes on line in Cushing, the recent increase in Bakken output may extend the high profitability of the mid-Continent refineries for several more years beyond that.
I only have one small quibble with your article. The investment in Phillips 66 by Berkshire Hathaway doesn't actually represent an investment made by Buffett himself but was made by Berkshire investment managers Todd Combs or Ted Weschler. As Tim McAleenan wrote in Seeking Alpha on July 16, 2012, "it's a shame that some media outlets will report any Berkshire move as an action by Warren Buffett. In this case, it's wrong to assume that Buffett has been gobbling up shares of Phillips 66. To the extent that Buffett's moves affect your own investment calculus, extra diligence may be required in determining whether Buffett or his assistants are making a particular stock purchase. It's just a shame that sorting through prominent media misreporting is part of the process."
Read more about Phillips 66 with an independent assessment of the company's business strategy and execution at:
http://bit.ly/JwYtWQ
You may also want to read a financial analysis of Phillips most profitable refinery, the old Marland Refinery at Ponca City, which earned over $500 million in profit for Phillips in 2011 and is on track to earn in excess of $600 million in 2012 at:
http://bit.ly/Nm7mae
Best Regards,
Hugh Pickens
Long PSX
Conoco And Phillips 66: Sum Of Parts Now Worth Less Than Whole [View article]
The only statement in your article that I would take issue with is that in the Refining and Marketing Business Segment "Phillips is working with razor thin margins, and in the volatile refining business that can be a dangerous thing."
Actually Phillips Refining and Marketing Business Segment had a ROCE of 12% last year and Phillips CEO Greg Garland stated at his presentation to the Citi Global Energy Conference on June 5 that his expectation was that Phillips could improve Phillips return on R&M to a 15% ROCE business over the cycle.
There are two ways Phillips is going to do this: First Phillips may be purchasing 2,000 railroad cars able to move 100,000 barrels of of shale related crudes per day which will let Phillips get advantaged crude from mid-continent to the front end of Phillips coastal refineries. Keep in mind that because of the glut of mid-continent oil that can't get of Cushing there is presently a big price advantage for mid-continent crude and this is expected to last for three to five years until additional pipeline capacity can be built to the coastal refineries. Garland says getting more advantaged crudes to coastal refineries will translate to about $500 million of annual net income to Phillips.
Second Phillips plans to increase yields in their refineries. Every one percent clean product yield is worth somewhere between $100 to $150 million of net income and Phillips is pretty comfortable they can eke out a couple more percentage points in clean product yields.
Read more about Phillips 66 with an independent assessment of the company's business strategy and execution at:
http://bit.ly/JwYtWQ
Best Regards,
Hugh Pickens
Long PSX
What Phillips 66 May Do Next [View article]
I agree that Phillips will be de-emphasizing the Refining and Marketing Business Segment and expect that they will have divested themselves of all but the highly profitable mid-continent refineries within three to five years.
If Phillips 66 anticipates such high ROCE in their chemical and midstream segments perhaps they should start to think of the company as a growth stock rather than a value stock and forgo the dividend altogether retaining the cash to help fund either the acquisition of Spectra's portion of the Midstream joint venture or to fund buying out Chevron's portion of the Chemical joint venture. It would be a gutsy move that would tell the street that they really believe in the growth possibilities of these two business segments.
Perhaps Greg Garland will be making an announcement on June 5, 2012 at the 2012 Citi Global Energy Conference with more detailed information on how the company plans to implement their strategy for growing chemical and midstream.
In the meantime, read more about Phillips 66 with an independent assessment of the company's business strategy and execution at:
http://bit.ly/JwYtWQ
Best Regards,
Hugh Pickens
Long PSX
ConocoPhillips And Phillips 66 Stand Apart From Peers [View article]
Regarding refining, the Alliance refinery is presently on the market per Garland's remarks to Reuters on May 1 but he won't "let the refinery go cheap." Bayway is another matter. Phillips 66 plans to keep the Bayway plant and its foothold in the East Coast refining market. "It's a good machine. It should be the last refinery standing in PADD I," says Garland. The mid-continent refineries are Phillips 66′s most profitable refining assets and won't be sold or closed for at least 3 to 5 years due to the bottleneck at Cushing that is keeping the price of high quality crudes in the Mid-Continent refineries low because there are no pipelines to carry them to world markets. However according to Clayton Reasor, Phillips 66's senior vice president of strategy and corporate affairs, at the UBS energy conference the price spread between West Texas Intermediate crude and Brent crude futures is likely to narrow sharply in 2013 as increased domestic pipeline capacity relieves the glut created by new shale-oil supplies.
Read more about Phillips 66 with an independent assessment of the company's business strategy and execution at:
http://bit.ly/JwYtWQ
Best Regards,
Hugh Pickens
Long PSX
Phillips 66: An S&P 500 Addition With Growth Prospects [View article]
Read more about Phillips 66 with an independent assessment of the company's business strategy and execution at:
http://bit.ly/JwYtWQ
Best Regards,
Hugh Pickens
Long PSX
Phillips 66: An S&P 500 Addition With Growth Prospects [View article]
Read more about Phillips 66 with an independent assessment of the company's business strategy and execution at:
http://bit.ly/KfvQPu
Best Regards,
Hugh Pickens
Long PSX
Putting A Value On The Conoco / Phillips 66 Spinoff [View article]
Phillips is making a $5 billion investment in its Chemicals Business Segment which has a COBE of 28% and there is a glut of low priced natural gas that feeds Phillips plants that should last for the next 4 to 5 years.
Read more about Phillips 66 with an independent assessment of the company's business strategy and execution at:
http://bit.ly/KfvQPu
Best Regards,
Hugh Pickens
Long PSX
Phillips 66: This Energy Spin-Off Will Reward Patient Investors [View article]
http://bit.ly/KfvQPu
Best Regards,
Hugh Pickens
Phillips 66 Valuation Suggests 45% Upside - Part 1 [View article]
http://bit.ly/KfvQPu
Best Regards,
Hugh Pickens