10-Q: Phillips 66 Reports Q3 2024 Results, Impacted by Refining Margins and Litigation

Phillips 66's third-quarter earnings were significantly lower than the previous year due to decreased refining margins and a large litigation accrual, despite some gains in other areas.

Summary

• Phillips 66 reported net income attributable to the company of $346 million for the third quarter of 2024, a significant decrease from $2.1 billion in the same period of 2023.
• The company's nine-month earnings also declined to $2.1 billion, compared to $5.8 billion in the prior year.
• The decrease in earnings was primarily due to lower refining margins, driven by reduced market crack spreads, and a $605 million accrual related to litigation with Propel Fuels, Inc.
• These negative impacts were partially offset by higher equity earnings from CPChem and lower income tax expenses.
• Sales and other operating revenues decreased by 10% in the third quarter but were flat for the nine-month period.
• Purchased crude oil and products decreased by 6% in the third quarter but increased by 5% over the nine-month period.
• The company's effective income tax rate decreased to 11% for the third quarter and 20% for the nine-month period, compared to 24% and 23% respectively in 2023.
• Phillips 66 completed the acquisition of Pinnacle Midland Parent LLC for $567 million and sold certain assets for $219 million during the quarter.
• The company repurchased $800 million of common stock and paid $477 million in dividends during the third quarter.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with significant negative impacts on earnings due to lower refining margins and a large litigation accrual. While there are some positives, such as strategic acquisitions and debt reduction, the overall tone is negative due to the substantial decrease in profitability.

Positives

• Equity earnings from CPChem increased, partially offsetting the negative impacts from refining and litigation.
• The company completed the acquisition of Pinnacle Midland Parent LLC, expanding its natural gas operations.
• Phillips 66 extinguished $1.1 billion of debt, improving its financial position.
• The company continues to return capital to shareholders through share repurchases and dividends.
• The effective income tax rate decreased for both the three and nine month periods.

Negatives

• Net income attributable to Phillips 66 decreased significantly in both the third quarter and the nine-month period.
• Refining margins were significantly lower due to decreased market crack spreads.
• The company recorded a $605 million accrual related to litigation with Propel Fuels, Inc., impacting earnings.
• The Midstream segment saw a decrease in earnings due to impairments and unfavorable pricing.
• The Renewable Fuels segment experienced a loss due to higher feedstock costs and lower emissions credit prices.

Risks

• The company faces ongoing litigation with Propel Fuels, Inc., with potential for significant additional damages.
• The company's refining segment is exposed to volatile market crack spreads.
• The company's Midstream segment is exposed to fluctuations in NGL and natural gas prices.
• The company's Renewable Fuels segment is exposed to fluctuations in feedstock costs and emissions credit prices.
• The company is subject to various environmental regulations and potential liabilities.
• The company is exposed to credit risk from its customers and counterparties.
• The company is exposed to risks related to its joint ventures, including Dakota Access, LLC.
• The company is exposed to risks related to climate change and related regulations.

Future Outlook

The company announced progress on its strategic priorities intended to enhance long-term shareholder value, including achieving $1.4 billion in run-rate business transformation savings, expanding its Midstream NGL business, and achieving over $400 million of run-rate synergies from the integration of DCP Midstream Class A Segment. The company also expects to close the sale of its 49% interest in Coop Mineraloel AG in the first quarter of 2025.

Management Comments

• In October 2024, we announced progress on our strategic priorities intended to enhance long-term shareholder value.
• We have distributed $12.5 billion through share repurchases and dividends since July 2022 and are on pace to achieve our $13 billion to $15 billion target by year-end 2024.
• We achieved $1.4 billion in run-rate business transformation savings, delivering on our cost reduction target.
• We expanded our Midstream NGL wellhead-to-market business with the acquisition of Pinnacle Midstream and approved a follow-on processing plant expansion in the Midland Basin expected to be completed in mid-year 2025.
• We have achieved our target of over $400 million of run-rate synergies from the integration of DCP Midstream Class A Segment.
• We have received proceeds of $1.3 billion since 2022 toward our $3 billion asset disposition target.

Industry Context

The results reflect the challenges in the refining industry due to lower market crack spreads and the impact of commodity price fluctuations on the Midstream and Renewable Fuels segments. The company's strategic moves, such as the acquisition of Pinnacle Midstream and asset dispositions, indicate a focus on optimizing its portfolio and enhancing long-term value. The litigation with Propel Fuels highlights the risks associated with intellectual property and business development activities in the renewable fuels sector.

Comparison to Industry Standards

• Phillips 66's refining margins were significantly impacted by lower market crack spreads, a trend seen across the refining industry in Q3 2024. Companies like Valero and Marathon Petroleum also reported lower refining margins in the same period.
• The company's Midstream segment performance is comparable to other midstream companies, with results influenced by NGL and natural gas prices. Companies like Enterprise Products Partners and Kinder Morgan also face similar market dynamics.
• The company's Renewable Fuels segment is still in the ramp-up phase, and its performance is not directly comparable to established renewable fuel producers. However, the challenges faced by Phillips 66 in this segment, such as higher feedstock costs and lower emissions credit prices, are common in the industry.
• The litigation with Propel Fuels is a unique event for Phillips 66 and does not have a direct industry benchmark. However, it highlights the risks associated with intellectual property and business development activities in the renewable fuels sector, which is a growing area of focus for many energy companies.

Legal Proceedings

• Phillips 66 Company is involved in litigation with Propel Fuels, Inc., where a jury returned a verdict against the company for $604.9 million in compensatory damages.
• The company is in ongoing settlement discussions with the Colorado Department of Public Health & Environment, Air Pollution Control Division regarding alleged violations at its Enterprise Compressor Station.
• The company is in ongoing discussion with the EPA regarding alleged violations at the Artesia and Eunice Natural Gas Processing Plants in New Mexico.
• The company is engaged in confidential discussions with the U.S. EPA and U.S. DOJ regarding alleged violations of the Clean Air Act at multiple refineries.

Related Party Transactions

• The company sold NGL, other petrochemical feedstocks and solvents to Chevron Phillips Chemical Company LLC (CPChem).
• The company sold gas oil and hydrogen feedstocks to Excel Paralubes LLC (Excel).
• The company sold refined petroleum products to several of its equity affiliates.
• The company purchased crude oil, refined petroleum products, NGL and solvents from WRB Refining LP (WRB).
• The company purchased natural gas and NGL from CPChem.
• The company paid NGL fractionation fees to CPChem.
• The company paid fees to various pipeline equity affiliates for transporting crude oil, refined petroleum products and NGL.

Stakeholder Impact

• Shareholders are impacted by the decrease in earnings and the ongoing litigation.
• Employees may be impacted by the restructuring of the Los Angeles Refinery.
• Customers may be impacted by changes in product availability and pricing.
• Suppliers may be impacted by changes in the company's purchasing patterns.
• Creditors may be impacted by changes in the company's debt levels and credit ratings.

Next Steps

• The company will continue to pursue its strategic priorities, including cost reductions, asset optimization, and capital returns to shareholders.
• The company will continue to defend its position in the Propel Fuels litigation and pursue post-judgment remedies and file an appeal.
• The company will continue to work with the USACE on the Dakota Access pipeline EIS.
• The company expects to close the sale of its 49% interest in Coop Mineraloel AG in the first quarter of 2025.
• The company expects to close the sale of its equity interests in certain pipeline and terminaling assets in North Dakota in the fourth quarter of 2024.

Key Dates

Keywords

Refining, Midstream, Chemicals, Renewable Fuels, Litigation, Earnings, Margins, Acquisition, Debt, Share Repurchase, Dividends, Impairment, Crack Spreads, NGL, Natural Gas