Phillips 66 - A Great Stock At Any Oil Price

| About: Phillips 66 (PSX)


PSX has greatly benefited from the high refining margins, which have resulted from the collapse of the oil price during the last one and a half year.

Nevertheless, the company is also well positioned even in the case of a pronounced rebound of the oil price.

In addition, the exemplary management and the great endorsement of Buffett, who now holds a 12.5% stake in the company, are very promising for the stock.

The price of oil has plunged 70% since the summer of 2014, taking the stocks of oil producers down with it. On the other hand, the refiners have greatly benefited from this collapse. However, most investors hesitate to invest even in refiners, fearing they may be investing near the top of the cycle of refining margins. For these investors, Phillips 66 (NYSE:PSX) is a suitable stock, as it greatly benefits from high refining margins while its other segments will greatly profit from a potential rebound of the oil price.

Phillips 66 has greatly benefited from the high refining margins, which have resulted from the collapse of the oil price during the last one and a half year. To be sure, its earnings from its refining segment have almost doubled in the first 9 months of the year, from $1.25 B to $2.15 B, and now comprise 60% of its total earnings. Even better, OPEC is not expected to curtail its output at least till its next meeting, in June, while Iran is about to pour 500,000 additional barrels of oil per day in the already oversupplied market. Therefore, the price of oil is likely to remain at levels that will not hurt refining margins for at least another year. Even if it rebounds from its current unsustainable levels, it is not likely to rise above $70-$80 for at least 1-2 years and hence the refining margins are likely to remain around their current elevated level. All in all, the refining segment of Phillips 66 is likely to keep thriving for the foreseeable future.

Of course the company will be somewhat hurt by the recent lift of the crude export ban. As WTI has stopped trading at a meaningful discount to Brent, the US refining margins are likely to drop by a small percent. However, significant tax benefits will be offered to US refiners as a means of compensation. Moreover, Phillips 66 has greatly increased its access to advantaged crude oil by expanding its system capabilities. More specifically, the percent of advantaged crude oil increased from 74% in 2013 to 94% in 2014 thanks to the increased processing of shale and similar tight oils that consistently trade at a discount to Brent.

It is also remarkable that the CEO of the company recently confirmed that the company was supporting the lift of the crude export ban, which was an impressive statement for a CEO of a refining company. While I disagree with him that the company will not be hurt by the lift in the long run, the most important takeout from his statement is the integrity of the management of the company, which is of paramount importance and represents a great plus for the value of the stock. Another great fact for the management is its decision to spend about half of this year's capital expenses on its mostly hit segment, namely the midstream segment, which had almost negligible contribution to last year's earnings. I consider this decision of the management a great positive; while other companies tend to invest in their most profitable segment, sometimes at the top of its cycle, the management of Phillips 66 seems to have a much more cautious, long-term view. As an example of the great mistakes of other oil companies, we all remember the great wave of sales of refining assets that most oil majors executed while oil was trading around $100 and refining margins were record-low; sure the oil majors are regretting those asset sales now.

While the refining segment of Phillips 66 is expected to keep thriving for the foreseeable future, the company is also well positioned even in the case of a pronounced rebound of the oil price. To be sure, if the price of oil experiences a strong rebound, the earnings of the refining and marketing segments are likely to drop but the earnings of the midstream and chemical segments are likely to markedly increase. This diversification greatly enhances the defense of the company against any scenario of oil prices, in contrast with other refiners, such as Valero (NYSE:VLO), who generate almost all their earnings from their refining segment. Of course Phillips 66 enjoys its highest earnings under the current conditions of the oil market but its earnings will not collapse even if the oil price returns to $80-$100.

Apart from all the above great features of the company, there is another recent piece of news to confirm the value of the stock. Berkshire Hathaway (NYSE:BRK.B) bought slightly more than 5M shares from January 4th to January 11th, for a total of nearly $400M at an average price of $76.58/share. These purchases brought Berkshire Hathaway's position in the company to about 66.6M shares and a 12.5% ownership stake. Buffett has repeatedly confirmed his endorsement of the management of the company. As the current stock price is very close to the purchase price of Buffett, investors can follow Buffett on this position. As a side note, Buffett changes his positions much more often nowadays than in the past and hence I recommend taking profits on this position if it provides a significant profit in a short period. For instance, Berkshire bought a significant stake in Exxon Mobil (NYSE:XOM) in 2014, only to exit that position a few months later.

Finally, a great positive for Phillips 66 is its remarkably strong balance sheet. More specifically, the company has a current ratio of almost 2 while its net debt (as per Buffett, net debt = total liabilities - cash - receivables) currently stands at $16.2 B, which is only 3 times the annual earnings. Therefore, the company has great financial flexibility and is likely to continue to pronouncedly reward its shareholders. At the moment it is offering a 2.9% dividend yield, which will keep growing as per the management, while it also has about $3 B under its current share buyback program, which is worth 7% of the market cap of the company.

To sum up, Phillips 66 is a well-managed company, which greatly benefits from the collapse of the oil price while it is also well positioned even for a major rebound of the oil price. The company is very generous towards its shareholders and is likely to continue to be thanks to its strong balance sheet. The vote of confidence of Buffett, who now holds 12.5% of Phillips 66, is just a confirmation of the virtues of the company.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PSX over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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