What Does Phillips 66’s Cash Flow Analysis Suggest?
Why Is Phillips 66 Focusing on Its Midstream Segment?
Phillips 66’s cash flow from operations and investing
Phillips 66 (PSX) has seen a steep fall in cash balances in the past couple of quarters. Its cash balance in 1Q16 stood at $1.7 billion, showing a 68% decline over 1Q15.
In 2015, Phillips 66’s cash flow from operations were robust due to stronger refining earnings. But with the fall in refining earnings, cash flow from operations fell to $258 million in 1Q16. The company has continued its focus on growth. From 1Q15 to 1Q16, PSX committed an average of $1.3 billion per quarter to fund its investing activities, except for 4Q15 due to the contribution to DCP Midstream.
Phillips 66’s cash flow from financing
PSX’s cash from financing activities mainly consisted of changes in debt, dividend payments, and share repurchases. Its dividend has grown steadily over the past few quarters. In 1Q16, the company paid a dividend of $0.29 billion, an 8.8% growth over 1Q15. With a rise in its dividend and a fall in its stock price, Phillips 66’s dividend yield rose. Currently, PSX trades at a dividend yield of 3.0%. This is higher than its 2.5% dividend yield in 1Q15.
PSX’s peers Valero Energy (VLO), Marathon Petroleum (MPC), and HollyFrontier (HFC) currently trade at dividend yields of 4.3%, 3.5%, and 4.5%, respectively. The iShares Global Energy ETF (IXC) has ~5% exposure to oil refining sector stocks.
Phillips 66 (PSX) also focuses on share buybacks to increase value to its shareholders. In 1Q16, it bought back shares worth $0.39 billion. Combining dividend and buybacks, the company’s shareholder returns amounted to $0.69 billion in 1Q16 compared to $0.66 billion in 1Q15.
What does Phillips 66’s cash flow analysis suggest?
The fall in refining earnings has taken its toll on cash from operations and closing cash balance. Going forward, if refining earnings don’t improve, Phillips 66 will likely have to resort to an issuance of fresh debt to maintain its capex (capital expenditures) and shareholder returns. Alternatively, the company will likely have to cut capex or shareholder returns. The company could also use a mixture of both strategies. However, assuming strong summer demand, if refining earnings rise, the company’s cash position will likely improve, sparing it from making tough choices.
In the next part of our series, we’ll look at Phillips 66’s valuations and why the company is trading lower than historical averages.
Browse this series on Market Realist: