OREANDA-NEWS. Phillips 66 (NYSE: PSX), an energy manufacturing and logistics company, announces second-quarter earnings of USD 958 million, compared with earnings of USD 1.2 billion in the second quarter of 2012. Adjusted earnings were USD 935 million, compared with USD 1.4 billion in the same period last year.

“We continued to generate strong cash flows, despite less than favorable market conditions,” said Greg Garland, chairman and CEO of Phillips 66. “This enabled us to return more than USD 700 million of capital to our shareholders and strengthen our balance sheet, as planned. Reinforcing our commitment to creating shareholder value, our board of directors has authorized another USD 1.0 billion of share repurchases, in addition to the previously authorized USD 2.0 billion program.”

“Earnings declined from the previous quarter mostly as a result of the significant reduction in advantaged crude discounts and unplanned downtime in Chemicals and Refining. The company’s strategy remains unchanged. We will continue to enhance refining returns through increasing use of advantaged crudes while growing our higher-valued businesses,” said Garland.

Midstream

The Midstream segment generated earnings of USD 90 million in the second quarter of 2013, compared with adjusted earnings of USD 95 million in the same period last year. In the second quarter of 2012, the segment reported a loss of USD 75 million.

During the quarter, Phillips 66’s Transportation business generated earnings of USD 50 million. Excluding special items in the second quarter of 2012, Transportation earnings were USD 26 million higher than adjusted earnings in the previous year’s quarter. This increase was mostly due to improved throughput fees and higher volumes.
 
Second-quarter earnings related to the company’s equity investment in DCP Midstream were USD 30 million, USD 12 million lower than in the second quarter of 2012. This decrease was primarily attributable to impacts of asset dropdowns to DCP Midstream Partners, partially offset by improved prices and lower operating costs. Compared with the second quarter of 2012, increased natural gas prices more than offset the impact of lower natural gas liquids (NGL) prices.

Earnings from NGL Operations and Other were USD 10 million during the quarter, compared with USD 29 million from the same period last year. The decrease was primarily related to gains associated with inventory draws during the second quarter of 2012.

Chemicals

Second-quarter Chemicals earnings were USD 181 million, USD 61 million lower than adjusted earnings from the same period last year.

Earnings from Chevron Phillips Chemical Company’s (CPChem) Olefins and Polyolefins (O&P) segment were adversely impacted by unplanned power outages at its Sweeny Complex and an extended 91-day turnaround at its Port Arthur Facility. The downtime resulted in decreased production and sales volumes for ethylene, polyethylene and normal alpha olefins, as well as higher manufacturing costs. While industry margins remained strong, CPChem realized lower margins due to these unplanned events. Global utilization for O&P was 78 percent during the quarter.

Equity earnings from joint ventures within CPChem contributed USD 85 million to Phillips 66’s pre-tax Chemicals earnings during the second quarter, USD 15 million more than the same period last year. The improvement was a result of increased margins and higher volumes.

Refining

Refining recorded second-quarter earnings of USD 481 million, which were USD 404 million lower than adjusted earnings from a year ago. This decrease was primarily due to lower realized refining margins, particularly in the Central Corridor and Gulf Coast regions, partially offset by higher volumes. Compared with the second quarter of 2012, margins were negatively impacted by lower Gulf Coast gasoline and distillate product differentials, as well as tightened crude spreads in the Central Corridor and Western/Pacific regions.

The company’s Refining segment continued to incur increased costs to purchase Renewable Identification Numbers (RINs) under the Environmental Protection Agency’s Renewable Fuel Standards program. To the extent these costs are not captured in the selling price of motor fuels, realized refining margins are reduced.

During the quarter, 68 percent of the company’s U.S. crude slate was advantaged, compared with 58 percent in the same period last year. This increase was primarily a result of processing an additional 132,000 barrels per day of shale oil, as well as higher volumes of heavy Canadian crudes.

Compared with the first quarter of 2013, the company ran the same percentage of advantaged crude; however, tightening crude spreads reduced Refining’s earnings by more than USD 400 million. The Central Corridor region was primarily impacted by lower Canadian and West Texas Sour (WTS) differentials relative to West Texas Intermediate (WTI), and the company’s Gulf Coast refineries were exposed to higher crude costs relative to Light Louisiana Sweet (LLS). In addition, Refining’s earnings decreased by approximately USD 200 million due to lower clean product differentials across all regions. These impacts were partially offset by higher market crack spreads. During the quarter, worldwide clean product yield was 85 percent.

Phillips 66’s worldwide refining utilization was 94 percent in the second quarter. Unplanned downtime at several refineries, including the Sweeny and Wood River refineries, reduced utilization by 5 percentage points. The Central Corridor region achieved an overall capacity utilization of 100 percent during the quarter, despite the effects of downtime at the Wood River Refinery.

Marketing and Specialties (M&S)

Second-quarter earnings for M&S were USD 332 million. Adjusted earnings were USD 309 million, an increase of USD 25 million from the same quarter last year. The segment benefited from higher margins and decreased costs, partially offset by lower inventory impacts. Excluding inventory, M&S margins improved compared with the second quarter of 2012 primarily due to higher RINs values associated with renewable fuel blending activities. This more than offset weaker U.S. marketing margins in the second quarter of 2013.

Reported earnings for Phillips 66’s Specialties businesses were USD 77 million. Excluding special items, adjusted earnings were USD 54 million during the quarter, slightly higher than the second quarter of 2012 as improved volumes more than offset lower specialties margins.

M&S sales volumes improved in the second quarter of 2013 compared with the same period last year. Worldwide marketing volumes rose by 70,000 barrels per day. Volumes from the company’s flow improver and lubricant businesses increased by 17 percent and 7 percent, respectively.
 
Corporate and Other

Corporate and Other costs were USD 126 million after-tax for the second quarter, including USD 42 million of net interest expense. During the quarter, the company was impacted by environmental expenses and income tax adjustments. 

Financial Position, Liquidity and Return of Capital

During the quarter, Phillips 66 generated USD 968 million of cash from operations. Excluding changes in working capital, operating cash flow was USD 1.2 billion. The company funded USD 371 million in capital expenditures and investments. Phillips 66 repaid an additional USD 500 million of its amortizing three-year term loan, ending the quarter with USD 6.5 billion of debt and USD 4.2 billion of cash and cash equivalents. At the end of the quarter, the company’s debt-to-capital ratio improved to 23 percent and the net-debt-to-capital ratio remained at 9 percent. As of mid-year, Phillips 66 reported a year-to-date annualized return on capital employed (ROCE) of 18 percent, and an adjusted ROCE of 17 percent.

Phillips 66 returned USD 738 million of capital to shareholders in the second quarter. The company paid USD 192 million in dividends, consistent with the first quarter of 2013. During the second quarter, Phillips 66 also repurchased 8.6 million shares of common stock totaling USD 546 million, compared with 6.4 million shares totaling USD 382 million in the first quarter of 2013. Through the end of June, the company had repurchased 22.6 million shares of common stock totaling USD 1.3 billion as part of its previously announced USD 2.0 billion share repurchase program. Phillips 66 had 611 million shares outstanding as of June 30, 2013.

Strategic Initiatives

Phillips 66 continues to focus on growing its Midstream and Chemicals segments while enhancing refining returns by capturing opportunities created through the rise of oil and gas production in North America. Phillips 66 formed Phillips 66 Partners, a master limited partnership, to own, operate, develop and acquire primarily fee-based transportation and midstream assets. Its initial public offering closed on July 26, 2013. The units trade on the New York Stock Exchange under the ticker symbol “PSXP.” 

The Sand Hills and Southern Hills NGL pipelines began transporting products in the fourth quarter of 2012 and first quarter of 2013, respectively. The Sand Hills Pipeline serves the growing Eagle Ford and Permian Basin areas, and the Southern Hills Pipeline provides midcontinent producers access to the Gulf Coast markets. Combined, the pipelines extend more than 1,500 miles and will ramp up to an initial capacity totaling 375,000 barrels per day with the completion of planned pump stations.

By the end of the second quarter, the company’s Transportation business had taken delivery of 650 railcars of its 2,000 railcar order, which can be used to transport advantaged crude to Phillips 66 refineries on the East and West Coasts.

CPChem’s growth plan is primarily focused on the U.S. Gulf Coast where its facilities benefit from advantaged feedstocks. During the quarter, the fractionator expansion at CPChem’s Sweeny Facility began operations. The project increased capacity by 22,000 barrels per day, or 19 percent. Other projects in the region, including the ethane cracker and related polyethylene facilities and the 1-hexene facility at Cedar Bayou, remain on schedule.

Phillips 66 continues to enhance returns by increasing access to advantaged feedstocks and expanding its refined product export capability. During the quarter, a high-capacity truck rack was commissioned at the Ponca City Refinery, providing additional access to Mississippian Lime crude. In the second quarter of 2013, refined product exports totaled 181,000 barrels per day, an increase of 75,000 barrels per day from the same period last year and 31,000 barrels per day more than last quarter.

During the second quarter, Phillips 66 sold its proprietary E-GasTM technology and related licenses. Additionally, in July the company closed on its sale of the Immingham Combined Heat and Power Plant in the United Kingdom.

Consistent with the company’s intent to grow shareholder distributions, Phillips 66’s board of directors has authorized USD 1.0 billion of additional share repurchases. The shares will be repurchased from time to time in the open market using available cash at the company’s discretion subject to market conditions and other factors, and in accordance with applicable regulatory requirements. The company may commence, suspend or discontinue purchases of common stock at any time or periodically without prior notice. Shares of stock repurchased will be held as treasury shares.