Phillips 66 Sees Improved Conditions, Debt Reduction

Like in the third quarter, Phillips 66 PSX reported a large improvement in fourth-quarter earnings from the year before as market conditions continue to improve with an economic recovery. Adjusted earnings soared to $1.3 billion from a loss of $507 million a year ago largely due to the refining segment. Debt fell to $14.4 billion by year-end from $15.9 billion at the beginning of the year as management continues to target the $12 billion precoronavirus level. It plans to pay off another $1.5 billion debt in April, which should put it closer to its target. While it might take a couple of years to get there, management indicated share repurchases could resume around midyear if market conditions remain strong. We expect this will be the case given the continued recovery of the economy along with refined product demand. Combined with already low inventory levels, margins and utilization levels should remain high. Our fair value estimate and moat rating are unchanged. The refining segment showed adjusted earnings recovered strongly to $404 million compared with a $1.1 billion loss a year ago. Market conditions have improved significantly through the year, but in some cases remain challenging with tight crude spreads and high RIN costs. Phillips 66's capture rate improved to 65% from 44% in the third quarter, but remains relatively low. Light crude spreads will likely remain tight, but heavy sour spreads should widen with greater OPEC+ volumes on the market and higher demand in Europe for light sweet crude. The impact of RINs has also moderated through the year as prices have fallen on recently revised Environmental Protection Agency volume obligation announcements while crack spreads adjusted to the higher credit prices. In total, given the favorable market conditions, we expect continued strong refining results in 2022.

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