Refiners Beat Expectations Across The Board

Probably without realizing it at the time, ConocoPhillips Corp. created what has become a prosperous energy company in 2012 by spinning off Phillips 66 into a separate entity focused primarily on refining.

As a result, one of the few bright spots among the third-quarter earnings reports is that Phillips 66, which reported on Oct. 30, had its best quarter since it became independent thanks to what has hurt other energy companies: the low price of oil and the high demand for gasoline. Even Phillips 66 former parent company, Conoco Phillips, reported a net loss of $1.1 billion for the third quarter on Oct. 29.

But for Phillips 66, from July through September, net income soared by 34 percent above the same period in 2014, mostly because its refining profits rose by 80 percent. In fact, two of its 15 refineries on the Texas and Louisiana Gulf Coast operations ran at 100 percent capacity.

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“[Phillips 66] outperformed even the high expectations,” Jeff Dietert, of the Houston-based investment bank Simmons & Company International. He added that the news for the company should remain good for a while because gasoline demand is expected to remain high in 2016.

Phillips 66 wasn’t the only refining company with good news from third-quarter operations. Others reporting strong earnings last week were CVR Energy Inc. of Sugar Land, Texas; Marathon Petroleum Corp. of Findlay, Ohio; PBF Energy Co. of Parsippany, N.J.; Texoro Corp. of San Antonio, Texas; and Valero Energy Corp. of San Antonio, Texas.

“It was a beat across the board in every one of [Phillips 66’s] segments,” Justin Jenkins, an analyst at Raymond James in Houston, told Bloomberg. “Refining is clearly the healthiest segment of the overall energy value chain at the moment, and that’s probably going to continue for some time.”

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Phillips 66 is more than twice as valuable as it was when it gained its independence in 2012 as ConocoPhillips decided to shed its downstream assets, including refining operations. That may be why Warren Buffet’s Berkshire Hathaway recently invested generously in the company.

Earlier this year, the holding company sold its 19 million shares in Phillips 66, only to re-invest in the company, buying an 11 percent stake worth over $5 billion. Evidently Buffet recognized that American refiners enjoy good profits because their operations are close to where oil is drilled. By contrast, North Sea crude is more expensive because it is extracted farther from refineries.

“[Phillips 66’s] companies are running better business models that they learned from past experience,” said Fadel Gheit, an analyst at the investment bank Oppenheimer & Co. in New York. As a result, he said, “[t]hey are returning cash aggressively to shareholders.”

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Since it became independent, Phillips 66 created an affiliated master limited partnership, Phillips 66 Partners, to handle its terminal and pipeline operations. It also has been working on its joint venture in the Chevron Phillips Chemical Co.

But these operations are still being set up, so for now Phillips 66 is relying on refining for its revenues. Or as Chairman and CEO Greg Garland said in a statement, “We’ve been running max gasoline, and we have been all year.”

By Andy Tully of Oilprice.com

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