Oil prices have been lower during the last quarter of 2013 compared to the previous three quarters. As a result, some oil and gas companies have not been able to report impressive results. However, Phillips 66 (NYSE:PSX) has not been hit by the decline in oil prices during the quarter and the company reported impressive results for the fourth quarter on January 29.
A Glance at the Earnings
Phillips 66 announced its earnings with an impressive growth of 16%. The earnings for the fourth quarter totaled $876 million, as opposed to $708 million for the same period last year. Most of this growth came from the midstream segment and refining business which grew by 31.5% and 23%, respectively. A fall in earnings of 35% from the Marketing and Specialties segment caused the earnings to fall back a little - however, the overall growth in the business was impressive during the past twelve months. The midstream segment was the main reason that Phillips 66 was separated from ConocoPhillips (NYSE:COP) in order to completely focus on the midstream business unit and discover its true potential. On a year-over-year basis, the midstream business of the company has grown substantially. Other than that, chemicals segment grew by 0.6% year-over-year. Although marketing and specialties segment fell in the last quarter, still it has given a growth rate of 51% year-over-year, which is the highest after the midstream segment.
Increased free cash flow
In the year 2013, the cash from continued operations stood at $5.9 billion. After subtracting changes in working capital, cash flow from operations becomes $5.1 billion. Besides that, the company spent $1.8 billion on investments and capital expenditures. Excluding this, the free cash flow to firm becomes $3.3 billion. Moreover, Phillips 66 paid $1 billion of its outstanding debt amortized on a three-year term. After taking out this amount, the free cash flow to equity becomes $2.3 billion. Free cash flow to firm basically tells the amount of free cash flow available to the firm from which it has to take care of its debtors as well as its equity holders. This is why, after taking out repayment of debt, we get free cash flow to equity. As the name suggests, this cash flow is available in the end for the equity holders after the company pays off its obligations. The company may choose to either invest it back into the business for growth purposes or distribute it in the form of dividends.
In 2012, the net income was $4.13 billion. Adding back depreciation and amortization of $913 million, and taking out changes in working capital of $1.156 billion and capital expenditure of $1.721 billion, the free cash flow to firm becomes $2.166 billion. Further subtracting repayment of debt worth $1.21 billion, free cash flow to equity becomes $956 million. Comparing free cash flow to firm of 2013 to its prior year, the company has shown an increase of 52%. While in the case of free cash flow to equity, the company showed a robust growth of 140%.
Possibility of Dividend Growth, Financial Position and Capital Projects
During the last year, Phillips 66 paid $807 million in dividends. With $2.3 billion as free cash flow to equity, the company easily has the capability of increasing its dividends annually. There is a substantial room available for the company to grow its dividends. Phillips 66 has shown impressive growth in its dividends and the company has a special focus on its dividend policy. The free cash flows are growing which should allow the company to grow dividends without sacrificing future growth opportunities. This would allow the company to increase its profitability margins, subsequently, increasing its cash flow. Moreover, the company had $6.2 billion in the long-term debt at the end of 2013 while its cash and cash equivalents were at $5.4 billion, including $425 million held by Phillips 66 Partners. Even if we exclude the amount held by Phillips 66 Partners, the company can still pay 87% of its total long-term debt by its most liquid assets. It is safe to say that the company will not be facing any issue regarding its debt in the short term.
Phillips 66 is investing in its transport business in order to bring down transportation costs and build a strong transportation network. Recently, the company started another capital expenditure which would allow it to transport the low cost oil through Pipeline. The Cross channel connector project has two phases. By the end of phase one, the cross channel connector will have the capability of transporting 180,000 barrels per day, which alone accounts for huge growth in company's supply of oil. After the completion of phase two, the company will have an additional 50,000 barrels of oil per day.
Phillips 66 has shown remarkable growth in its earnings and cash flows over the course of 2013. Moreover, as we looked into the segments earlier, we found that midstream and refining were the fastest growing businesses for the company. As a result, more than 70% of the capital expenditure is focused on these two segments. This is how the earnings and cash flow of the company are expected to grow even more in the coming quarters. The core business of the company is growing at an extremely attractive rate. Furthermore, the growth in its cash flows will allow the company to grow its dividends as well as invest in capital projects in order to support future growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.