Phillips 66 10-K Analysis & Summary – 2/21/2025

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Phillips 66

10-K

Annual report

Filing date:

02/21/2025

TLDR:

Phillips 66 experienced a decrease in net income due to lower refining margins, but is strategically investing in Midstream and Renewable Fuels. A hold rating is recommended pending further assessment of the Los Angeles Refinery closure and recent acquisitions.

ELI5:

Phillips 66 made less money this year because it cost more to refine oil, but they’re investing in pipelines and renewable energy. It’s like they’re trying to balance old and new energy sources.

Accession #:

0001534701-25-000074

Published on

March 16, 2025

Analyst Summary

Net income decreased due to lower refining margins.
Strategic priorities include shareholder returns, operational excellence, and growth in Midstream and Chemicals.
The Los Angeles Refinery closure in 2025 will impact future performance.
Acquisition of Pinnacle Midstream and pending acquisition of EPIC Y-Grade are positive developments for the Midstream segment.
CPChem’s expansion projects are expected to contribute to future growth in the Chemicals segment.
Conversion of the San Francisco Refinery into the Rodeo Renewable Energy Complex is a strategic shift towards renewable fuels.
Sales and other operating revenues decreased by 3% year-over-year.
Equity in earnings of affiliates decreased by 12%.
Selling, general, and administrative expenses increased by 11%.
Cash and cash equivalents decreased significantly.
Total debt increased slightly.
Total equity decreased, primarily due to share repurchases.
Debt-to-Equity Ratio increased from 0.61 to 0.71.

Opportunities and Risks

Commodity Price Volatility: Fluctuations in crude oil, refined product, and NGL prices can significantly impact profitability.
Regulatory Changes: Changes to environmental regulations, renewable fuel standards, and tax policies can increase operating costs and reduce demand for certain products.
Operational Hazards: Accidents, weather events, and cyberattacks can disrupt operations and result in significant losses.
Cybersecurity Threats: Increasing sophistication of cyberattacks poses a risk to information systems and data security.
Los Angeles Refinery Closure: The planned closure of the Los Angeles Refinery will result in asset write-downs and potential disruptions to supply chains.
Growth in Midstream: The acquisition of Pinnacle Midstream and the pending acquisition of EPIC Y-Grade provide opportunities to expand the company’s natural gas and NGL infrastructure.
Expansion in Chemicals: CPChem’s ongoing expansion projects on the U.S. Gulf Coast and in Qatar are expected to contribute to future growth.
Energy Transition: The conversion of the San Francisco Refinery into the Rodeo Renewable Energy Complex positions the company to capitalize on the growing demand for renewable fuels.

Potential Implications

Company Performance

Near-term challenges due to lower refining margins and the Los Angeles Refinery closure.
Strategic investments in Midstream and Renewable Fuels position the company for long-term growth.
Future performance will depend on the successful commercialization of renewable fuels and the management of feedstock costs and regulatory credits.
Improved operational efficiency and profitability needed in the coming year.

Phillips 66 (PSX) 2024 10-K Filing Analysis

Executive Summary

This report analyzes Phillips 66’s 2024 10-K filing, focusing on key financial performance indicators, strategic initiatives, and risk factors. The company experienced a significant decrease in net income compared to 2023, primarily due to lower refining margins. Strategic priorities remain focused on shareholder returns, operational excellence, and disciplined growth. Key risks include commodity price volatility, regulatory changes, and cybersecurity threats. A hold rating is recommended, pending further assessment of the impact of the Los Angeles Refinery closure and the integration of recent acquisitions.

Company Overview

Phillips 66 is an integrated downstream energy company with five operating segments: Midstream, Chemicals, Refining, Marketing and Specialties (M&S), and Renewable Fuels. The company’s operations span crude oil and refined product transportation, petrochemical manufacturing, refining, and marketing of refined products and renewable fuels. Recent developments include the acquisition of Pinnacle Midstream, the pending acquisition of EPIC Y-Grade, and the conversion of the San Francisco Refinery into the Rodeo Renewable Energy Complex.

Detailed Analysis

Management’s Discussion and Analysis (MD&A)

Management attributes the decrease in net income to lower refining margins, despite increased refinery utilization rates. The narrative emphasizes a commitment to shareholder returns, operational efficiency, and strategic growth in the Midstream and Chemicals segments. The establishment of the Renewable Fuels segment highlights the company’s focus on the energy transition. The announced closure of the Los Angeles Refinery in 2025 is a significant event that will impact future performance.

Financial Statement Analysis

Income Statement

Key observations from the income statement include:

Sales and other operating revenues decreased by 3% year-over-year.
Equity in earnings of affiliates decreased by 12%, reflecting challenges in the Chemicals segment.
Selling, general, and administrative expenses increased by 11%, largely due to litigation accruals.
Impairments increased significantly, reflecting asset write-downs in the Midstream and Refining segments.

Balance Sheet

Key observations from the balance sheet include:

Cash and cash equivalents decreased significantly, reflecting capital expenditures, acquisitions, and shareholder returns.
Total debt increased slightly.
Total equity decreased, primarily due to share repurchases.

Key Ratios

The following table presents key financial ratios:

Ratio	2024	2023	Trend
Debt-to-Equity Ratio	0.71	0.61	Increasing (Higher Leverage)

Segment Performance

Midstream

The Midstream segment experienced a decrease in income before income taxes. The acquisition of Pinnacle Midstream is a positive development, but asset dispositions and unfavorable pricing impacted results. The pending acquisition of EPIC Y-Grade represents a significant growth opportunity.

Chemicals

The Chemicals segment’s income before income taxes increased, driven by improved margins and higher sales volumes. CPChem’s ongoing expansion projects on the U.S. Gulf Coast and in Qatar are expected to contribute to future growth.

Refining

The Refining segment reported a loss before income taxes, primarily due to lower realized margins. The planned closure of the Los Angeles Refinery will have a significant impact on future results. The conversion of the San Francisco Refinery into the Rodeo Renewable Energy Complex is a strategic shift towards renewable fuels.

Marketing and Specialties

The M&S segment’s income before income taxes decreased, largely due to litigation accruals. The acquisition of a marketing business on the U.S. West Coast is intended to support the placement of renewable diesel.

Renewable Fuels

The Renewable Fuels segment reported a loss before income taxes, reflecting higher costs associated with the ramp-up of the Rodeo Complex. The segment’s future performance will depend on the successful commercialization of renewable fuels and the management of feedstock costs and regulatory credits.

Risk and Opportunity Assessment

Risks

Commodity Price Volatility: Fluctuations in crude oil, refined product, and NGL prices can significantly impact profitability.
Regulatory Changes: Changes to environmental regulations, renewable fuel standards, and tax policies can increase operating costs and reduce demand for certain products.
Operational Hazards: Accidents, weather events, and cyberattacks can disrupt operations and result in significant losses.
Cybersecurity Threats: Increasing sophistication of cyberattacks poses a risk to information systems and data security.
Los Angeles Refinery Closure: The planned closure of the Los Angeles Refinery will result in asset write-downs and potential disruptions to supply chains.

Opportunities

Growth in Midstream: The acquisition of Pinnacle Midstream and the pending acquisition of EPIC Y-Grade provide opportunities to expand the company’s natural gas and NGL infrastructure.
Expansion in Chemicals: CPChem’s ongoing expansion projects on the U.S. Gulf Coast and in Qatar are expected to contribute to future growth.
Energy Transition: The conversion of the San Francisco Refinery into the Rodeo Renewable Energy Complex positions the company to capitalize on the growing demand for renewable fuels.

Uncommon Metrics

The filing highlights the following uncommon metrics:

Rodeo Complex Renewable Feedstock Processing Capacity: 50,000 B/D (800 million gallons per year), indicating the scale of the renewable fuels initiative.
DCP Midstream Synergies: $500 million of run-rate synergies achieved from the integration of DCP Midstream Class A Segment, demonstrating successful integration efforts.

Conclusion & Actionable Insights

Phillips 66 faces challenges in the near term due to lower refining margins and the planned closure of the Los Angeles Refinery. However, the company’s strategic investments in Midstream and Renewable Fuels position it for long-term growth. A hold rating is recommended, pending further assessment of the impact of the Los Angeles Refinery closure and the integration of recent acquisitions. Investors should closely monitor commodity price trends, regulatory developments, and the progress of the Rodeo Renewable Energy Complex.

Phillips 66 Financial Analysis – 2024

1. Financial Ratio and Metric Analysis

Profitability

Gross Profit Margin

Ratio/Metric: Sales and other operating revenues – Purchased crude oil and products / Sales and other operating revenues = (143,153 – 129,962) / 143,153 = 9.21%
Industry: Industry averages for refining companies typically range from 10% to 20%, but can vary significantly based on crude oil prices and refining spreads.

Operating Profit Margin

Ratio/Metric: Income before income taxes + Interest and debt expense / Sales and other operating revenues = (2,675 + 907) / 143,153 = 2.50%
Industry: Typical operating margins for refining companies range from 3% to 8%, but can fluctuate significantly.

Net Profit Margin

Ratio/Metric: Net income attributable to Phillips 66 / Sales and other operating revenues = 2,117 / 143,153 = 1.48%
Industry: Average net profit margins for refining companies are typically between 2% and 5%.

Return on Assets (ROA)

Ratio/Metric: Net income attributable to Phillips 66 / Total Assets = 2,117 / 72,582 = 2.92%
Industry: Industry average ROA is typically between 3% and 6%.

Return on Equity (ROE)

Ratio/Metric: Net income attributable to Phillips 66 / Total Equity = 2,117 / 28,463 = 7.44%
Industry: Industry average ROE is typically between 8% and 15%.

Earnings Per Share (EPS) – Basic and Diluted

Ratio/Metric: Basic EPS = 5.01, Diluted EPS = 4.99
Industry: EPS varies widely based on company performance and industry conditions.

Liquidity

Current Ratio

Ratio/Metric: Total Current Assets / Total Current Liabilities = 17,910 / 15,087 = 1.19
Industry: A current ratio between 1.0 and 2.0 is generally considered healthy for refining companies.

Quick Ratio (Acid-Test Ratio)

Ratio/Metric: (Total Current Assets – Inventories) / Total Current Liabilities = (17,910 – 3,995) / 15,087 = 0.92
Industry: A quick ratio above 1.0 is generally preferred, but a ratio between 0.8 and 1.0 may be acceptable depending on the industry.

Cash Ratio

Ratio/Metric: Cash and cash equivalents / Total Current Liabilities = 1,738 / 15,087 = 0.12
Industry: A cash ratio of 0.10 to 0.20 is typical for companies that have good cash flow.

Solvency/Leverage

Debt-to-Equity Ratio

Ratio/Metric: Total Debt / Total Equity = 20,062 / 28,463 = 0.70
Industry: A debt-to-equity ratio between 0.5 and 1.5 is generally considered acceptable for refining companies.

Debt-to-Assets Ratio

Ratio/Metric: Total Debt / Total Assets = 20,062 / 72,582 = 0.28
Industry: A debt-to-assets ratio below 0.5 is generally considered healthy.

Interest Coverage Ratio (Times Interest Earned)

Ratio/Metric: Income before income taxes + Interest and debt expense / Interest and debt expense = (2,675 + 907) / 907 = 4. A higher ratio indicates better solvency.
Industry: A ratio above 3.0 is generally considered healthy.

Activity/Efficiency

Asset Turnover

Ratio/Metric: Sales and other operating revenues / Total Assets = 143,153 / 72,582 = 1.97
Industry: An asset turnover ratio between 1.0 and 2.0 is typical for capital-intensive industries like refining.

Valuation

Price-to-Earnings Ratio (P/E)

Ratio/Metric: Stock Price / EPS = 127.63 / 5.01 = 25.48
Industry: The average P/E ratio for the S&P 500 is around 20-25, so Phillips 66’s P/E ratio is in line with the market.

Price-to-Book Ratio (P/B)

Ratio/Metric: Market Cap / Total Equity = (421.888 * 127.63) / 28,463 = 1.89
Industry: A P/B ratio between 1 and 3 is generally considered reasonable.

Price-to-Sales Ratio (P/S)

Ratio/Metric: Market Cap / Sales and other operating revenues = (421.888 * 127.63) / 143,153 = 0.38
Industry: A P/S ratio below 1 is generally considered good.

Enterprise Value to EBITDA (EV/EBITDA)

Ratio/Metric: (Market Cap + Total Debt – Cash) / (Net income + Income tax expense + Interest and debt expense + Depreciation and amortization) = ((421.888 * 127.63) + 20,062 – 1,738) / (2,175 + 500 + 907 + 2,363) = 8.98
Industry: An EV/EBITDA ratio between 8 and 12 is generally considered reasonable.

Growth Rates

Revenue Growth

Ratio/Metric: (Current Revenue – Previous Revenue) / Previous Revenue = (143,153 – 147,399) / 147,399 = -2.88%

Net Income Growth

Ratio/Metric: (Current Net Income – Previous Net Income) / Previous Net Income = (2,175 – 7,239) / 7,239 = -70%

EPS Growth

Ratio/Metric: (Current EPS – Previous EPS) / Previous EPS = (5.01 – 15.56) / 15.56 = -67.8%

Other Relevant Metrics

Refining Realized Margins

The company provides a detailed breakdown of realized refining margins by region. These margins are calculated by adding back taxes, depreciation, SG&A, operating expenses, equity in earnings/losses of affiliates, and other segment items to income before income taxes, and then dividing by adjusted total processed inputs.
These metrics are useful for understanding the profitability of the refining segment in different geographic areas.

Marketing Fuel Margins

The company also provides realized marketing fuel margins, which are calculated by taking income before income taxes and adding back depreciation, SG&A, equity in earnings of affiliates, other operating revenues, and other expenses, then subtracting the margin for nonfuel related sales.
These metrics are useful for understanding the profitability of the marketing and specialties segment.

2. Commentary

Phillips 66’s financial performance in 2024 reflects a challenging year compared to the previous two years, with significant declines in net income and EPS. While the company maintains a solid balance sheet with acceptable liquidity and solvency ratios, profitability metrics have decreased substantially. Revenue also experienced a slight decline. The company’s valuation metrics, such as P/E and P/S ratios, are within reasonable ranges, but the overall financial picture suggests a need for improved operational efficiency and profitability in the coming year.