Phillips 66 to Spend Billions on Midstream Expansion

Freeport LPG Terminal, one part a $3 billion midstream investment by Phillips 66 announced in February 2014. The terminal will have an initial export capacity of 4.4 million barrels per month, the equivalent of eight very large gas carriers (VLGCs), with a ship loading rate of 36,000 barrels per hour. Startup of the export terminal is expected in mid-2016. Image: Phillips 66

By Zain Shauk

July 30 (Bloomberg) — Phillips 66, the refining company that saw its shares drop last month on news of expanded U.S. oil exports, said second-quarter profit declined 9.9 percent as it began to focus more on making chemicals and transporting fuel.

Net income fell to $863 million, or $1.51 a share, from $958 million, or $1.53, a year earlier, the Houston-based company said in a statement today. Excluding one-time items, per-share profit fell short of the $1.69 average of 13 analysts’ estimates compiled by Bloomberg.

Changes in the ability to export oil could increase domestic crude prices, reducing the advantage for U.S. refiners paying less for oil than the international benchmark. News in June that the U.S. Commerce Department had relaxed its stance on the export of lightly processed oil sparked a sell off in refiner stocks, with Phillips 66 falling 4.2 percent on June 25. The shares have yet to recover from the decline.

The largest U.S. refiner by market value is expanding its chemicals division and midstream business, which moves and exports products. Those units are expected to play larger roles in future company earnings, mitigating any decline in refining profit, Rob Desai, an analyst for Edward Jones in St. Louis, said in an interview before the results were released.

“Refining is still a big part of the story, but I think they’ve done a good job of de-emphasizing that,” said Desai, who rates Phillips 66 a hold and doesn’t own the shares.

Record Earnings

The chemicals unit had record earnings for the quarter, rising 79 percent to $324 million and accounting for more than a third of profit. Earnings from the company’s branded gasoline stations and lubricants business dropped by more half to $162 million from $344 million a year earlier.

Exports of refined petroleum products increased 30 percent to 181,000 barrels a day from 139,000 barrels in the first quarter.

Phillips 66 plans to spend $12 billion on growth in the next three years, 90 percent of which will be on its chemical and midstream businesses as the company sees North American natural gas prices remaining low.

“We believe the uplift between domestic crude prices and global product prices will not be as durable or as long-lived as the uplift that exists between North America natural gas or natural gas liquids and global crude prices, which is what our midstream business or our chemicals business operate on,” Clayton Reasor, senior vice president of Phillips 66, said in a May 21 speech.

Phillips 66 was spun off from ConocoPhillips in 2012 and last year sold units in a pipeline partnership that now has a market value of $5 billion. The shares, which have 13 buy and seven hold recommendations from analysts, fell 0.2 percent yesterday to close at $82.47 in New York.

Copyright 2014 Bloomberg.

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