Market Overview

Phillips 66 Reports Second-Quarter Earnings of $1.3 Billion or $2.84 Per Share

Share:

Adjusted earnings of $1.3 billion or $2.80 per share

Highlights

  • Achieved 100 percent utilization in Refining
  • CPChem's new ethane cracker exceeding design rates
  • Generated $2.4 billion in cash from operations
  • Returned $602 million to shareholders through dividends and share
    repurchases
  • Increased quarterly dividend by 14 percent
  • Began construction of the 300,000 BPD Sweeny Hub NGL expansion project
  • Phillips 66 Partners recently completed Gray Oak Pipeline open season

Phillips 66 (NYSE:PSX), an energy manufacturing and logistics company,
announces second-quarter 2018 earnings of $1.3 billion, compared with
$524 million in the first quarter of 2018. Excluding special items of
$17 million in the second quarter, adjusted earnings were $1.3 billion,
compared with first-quarter adjusted earnings of $512 million.

"Our diversified portfolio generated strong earnings and cash flows this
quarter," said Greg Garland, chairman and CEO of Phillips 66. "We
advanced strategic growth initiatives and continued to reward our
shareholders. In Refining, we operated at full capacity and continued to
capture the benefits of advantaged feedstocks through our integrated
supply network. CPChem achieved full operations at its new U.S. Gulf
Coast petrochemicals assets, contributing to solid earnings growth. In
Midstream, the expansion of our Sweeny Hub will further grow and
optimize our NGL value chain. Most recently, Phillips 66 Partners
completed the Gray Oak Pipeline open season to capitalize on growing
Permian crude production."

"We returned $602 million to shareholders through dividends and share
repurchases this quarter. For the year, we have returned $4.4 billion to
shareholders. We demonstrated our commitment to a secure, competitive
and growing dividend with a 14 percent increase in the second quarter,
resulting in a 27 percent compound annual growth rate since 2012."

Midstream

    Millions of Dollars
Net Income     Adjusted Net Income
Q2 2018     Q1 2018 Q2 2018     Q1 2018
Transportation $ 137     136 137     136
NGL and Other 50 73 50 73
DCP Midstream     15     24 15     24
Midstream     $ 202     233 202     233

Midstream second-quarter net income was $202 million, compared with $233
million in the first quarter of 2018.

Transportation adjusted net income for the second quarter of 2018 was
$137 million, in line with the prior quarter.

NGL and Other second-quarter adjusted net income of $50 million was $23
million lower than first-quarter adjusted net income of $73 million,
mainly reflecting positive inventory impacts in the first quarter.

The company's equity investment in DCP Midstream generated adjusted net
income of $15 million in the second quarter, a $9 million decrease from
the first quarter, primarily due to the timing of incentive
distributions.

Chemicals

    Millions of Dollars
Net Income     Adjusted Net Income
Q2 2018     Q1 2018 Q2 2018     Q1 2018
Olefins and Polyolefins (O&P) $ 247     224 247     224
Specialties, Aromatics and Styrenics (SA&S) 32 18 32 18
Other     (17 )     (10 ) (17 )     (10 )
Chemicals     $ 262       232   262       232  

The Chemicals segment reflects Phillips 66's equity investment in
Chevron Phillips Chemical Company LLC (CPChem). Chemicals'
second-quarter net income was $262 million, compared with $232 million
in the first quarter of 2018.

CPChem's O&P business contributed $247 million of adjusted net income to
the Chemicals segment in the second quarter of 2018, compared with $224
million in the first quarter. The increase reflects ramp-up of the new
U.S. Gulf Coast petrochemicals assets. Global O&P utilization was 95
percent in the second quarter.

CPChem's SA&S business contributed $32 million of adjusted net income in
the second quarter of 2018, an increase of $14 million from the prior
quarter. The increase primarily reflects reduced downtime following
turnarounds in the first quarter.

The $7 million increase in CPChem's Other adjusted net costs in the
second quarter mainly reflects lower capitalized interest following
completion of the U.S. Gulf Coast Petrochemicals Project in the first
quarter.

Refining

      Millions of Dollars
Net Income   Adjusted Net Income
Q2 2018     Q1 2018 Q2 2018     Q1 2018
Refining       $ 910     91 911     89

Refining second-quarter net income was $910 million, compared with $91
million in the first quarter of 2018.

Refining adjusted net income was $911 million in the second quarter of
2018, compared with $89 million in the first quarter of 2018. The
increase was due to higher realized margins and volumes, as well as
lower turnaround costs.

Realized margins for the quarter increased to $12.28 per barrel from
$9.29 per barrel in the first quarter, reflecting improved market crack
spreads and wider crude differentials. Gasoline and distillate market
cracks were up 20 percent and 4 percent, respectively. The widening of
the Brent–WTI spread, larger discounts on U.S. inland crudes, and
improved heavy crude differentials all contributed to increased realized
margins.

Phillips 66's worldwide crude utilization rate was 100 percent, up from
89 percent in the prior quarter. Pre-tax turnaround costs for the second
quarter were $60 million, down from $245 million in the first quarter.

Marketing and Specialties

    Millions of Dollars
Net Income     Adjusted Net Income
Q2 2018     Q1 2018 Q2 2018     Q1 2018
Marketing and Other $ 187     139 145     129
Specialties     50     45 50     45
Marketing and Specialties     $ 237     184 195     174

Marketing and Specialties (M&S) second-quarter net income was $237
million, compared with $184 million in the first quarter of 2018. M&S
results in both periods included benefits from biodiesel blender tax
credits.

Adjusted net income for Marketing and Other was $145 million in the
second quarter of 2018, an increase of $16 million from the first
quarter. The increase was largely due to seasonally higher margins and
volumes, partially offset by higher operating costs and foreign currency
impacts. Refined product exports in the second quarter rose to 200,000
barrels per day (BPD) from 190,000 BPD in the prior quarter.

Specialties generated adjusted net income of $50 million during the
second quarter, compared with $45 million in the prior quarter.
Second-quarter adjusted net income reflects improved base oil margins.

Corporate and Other

    Millions of Dollars
Net Income     Adjusted Net Income
Q2 2018     Q1 2018 Q2 2018     Q1 2018
Corporate and Other     $ (207 )     (155 ) (183 )     (162 )

Corporate and Other second-quarter net costs were $207 million, compared
with net costs of $155 million in the first quarter of 2018. Net costs
in both periods included adjustments to the provisional income tax
benefit from U.S. tax reform recorded in the fourth quarter of 2017.

The $21 million increase in Corporate and Other adjusted net costs in
the second quarter was mainly due to higher net interest expense and tax
expense.

Financial Position, Liquidity and Return of Capital

Phillips 66 generated $2.4 billion in cash from operations during the
second quarter, including $610 million of cash distributions from equity
affiliates. Excluding working capital impacts, operating cash flow was
$1.7 billion.

During the quarter, Phillips 66 funded $230 million in share
repurchases, $372 million in dividends and $538 million of capital
expenditures and investments. Additionally, the company repaid $250
million of debt in the quarter. The company ended the quarter with 464
million shares outstanding.

As of June 30, 2018, cash and cash equivalents were $1.9 billion, and
consolidated debt was $11.4 billion, including $2.9 billion at Phillips
66 Partners (PSXP). The company's consolidated debt-to-capital ratio and
net-debt-to-capital ratio were 31 percent and 28 percent, respectively.
Excluding PSXP, the debt-to-capital ratio was 27 percent and the
net-debt-to-capital ratio was 23 percent.

Strategic Update

In Midstream, the company is expanding the Sweeny Hub, which is an
integrated natural gas liquids (NGL) fractionation, storage and export
complex strategically located on the Texas Gulf Coast with access to
petrochemicals, fuels and liquefied petroleum gas (LPG) export markets.
The expansion includes two 150,000-BPD-fractionators, associated
pipeline infrastructure, and 6 million barrels of additional storage
capacity at Phillips 66 Partners' Clemens Caverns. DCP Midstream has
committed to supply Y-grade NGL feedstock and has an option to acquire
up to a 30 percent ownership interest in the fractionators. Upon
completion of the expansion, expected in late 2020, the Sweeny Hub will
have 400,000 BPD of fractionation capability and access to 15 million
barrels of storage capacity.

Phillips 66 Partners recently completed the expansion open season to
determine the scope and capacity of the Gray Oak Pipeline system. The
pipeline will have initial capacity of 800,000 BPD based on shipper
commitments of 700,000 BPD and the reservation of capacity for walk-up
shippers. The pipeline is expandable to approximately 1 million BPD
subject to additional shipper commitments. Gray Oak will provide crude
oil transportation from the Permian and Eagle Ford to destinations in
Corpus Christi and Sweeny/Freeport, including the Phillips 66 Sweeny
Refinery. Phillips 66 Partners will be the largest equity owner in this
pipeline project with 75 percent interest. Third parties have options to
acquire up to 32.75 percent, which could result in the Partnership
owning a 42.25 percent share. The pipeline is expected to be in service
by the end of 2019, with total cost of approximately $2 billion.

In Corpus Christi, the Gray Oak Pipeline will connect to the new South
Texas Gateway Terminal under development by Buckeye Partners, L.P. The
marine terminal will have an initial storage capacity of 3.4 million
barrels and is expected to begin operations by the end of 2019. Phillips
66 Partners owns a 25 percent interest in the joint venture that owns
the terminal.

At the Beaumont Terminal, the company recently placed 1.3 million
barrels of new crude oil storage into service, bringing the terminal's
total crude and products storage capacity to 12.4 million barrels.
Additional crude oil tanks are under construction to increase storage
capacity to 14.6 million barrels by the end of this year.

DCP Midstream is further expanding the Sand Hills Pipeline capacity and
is expected to reach 485,000 BPD by the end of 2018. The pipeline
transports NGL from the Permian Basin and Eagle Ford to the Texas Gulf
Coast and is owned two-thirds by DCP Midstream and one-third by Phillips
66 Partners. Also in the Permian Basin, DCP Midstream has a 25 percent
interest in the Gulf Coast Express Pipeline project that is designed to
transport approximately 2 billion cubic feet per day (BCFD) of natural
gas to Gulf Coast markets. The Gulf Coast Express Pipeline is
anticipated to be completed in the fourth quarter of 2019. DCP Midstream
is adding gas processing capacity in the DJ basin. The Mewbourn 3 plant
is expected to be completed in the third quarter of 2018 and the
O'Connor 2 plant is scheduled for completion in the second quarter of
2019.

In Chemicals, CPChem reached full operations at its new world-scale
ethane cracker located at the Cedar Bayou facility in Baytown, Texas.
The cracker has demonstrated 3.5 billion pounds per year capacity, which
is 6 percent above original design.

In Refining, a project was approved for the Sweeny Refinery to optimize
a fluid catalytic cracking (FCC) unit to increase production of
higher-value petrochemical products and higher octane gasoline. The
project is anticipated to be completed in mid-2020.

At the Lake Charles Refinery, crude unit modifications to run more
domestic crudes and reduce feedstock costs have been completed.
Additional improvements are anticipated in the fourth quarter that will
further enhance refining returns. Phillips 66 Partners is constructing a
25,000 BPD isomerization unit at the refinery to increase production of
higher octane gasoline blend components. Expected completion has been
accelerated to the third quarter of 2019.

In Marketing, the company re-imaged 250 domestic sites during the second
quarter, resulting in approximately 1,700 re-imaged U.S. sites since the
program's inception in 2015.

Investor Webcast

Later today, members of Phillips 66 executive management will host a
webcast at noon EDT to discuss the company's second-quarter performance
and provide an update on strategic initiatives. To access the webcast
and view related presentation materials, go to www.phillips66.com/investors
and click on "Events & Presentations." For detailed supplemental
information, go to www.phillips66.com/supplemental.

Earnings

           
Millions of Dollars
2018 2017
Q2   Q1  

Jun
YTD

Q2  

Jun
YTD

Midstream $ 202 233 435 96 208
Chemicals 262 232 494 196 377
Refining 910 91 1,001 224 483
Marketing and Specialties 237 184 421 214 355
Corporate and Other     (207 )   (155 )   (362 ) (149 )   (279 )
Net Income 1,404 585 1,989 581 1,144
Less: Noncontrolling Interests     65     61     126   31     59  
Phillips 66     $ 1,339     524     1,863   550     1,085  
 

Adjusted Earnings

Millions of Dollars
2018 2017
Q2   Q1  

Jun
YTD

Q2  

Jun
YTD

Midstream $ 202 233 435 101 213
Chemicals 262 232 494 196 397
Refining 911 89 1,000 233 231
Marketing and Specialties 195 174 369 218 359
Corporate and Other     (183 )   (162 )   (345 ) (148 )   (278 )
Net Income 1,387 566 1,953 600 922
Less: Noncontrolling Interests     65     54     119   31     59  
Phillips 66     $ 1,322     512     1,834   569     863  
 

About Phillips 66

Phillips 66 is a diversified energy manufacturing and logistics company.
With a portfolio of Midstream, Chemicals, Refining, and Marketing and
Specialties businesses, the company processes, transports, stores and
markets fuels and products globally. Phillips 66 Partners, the company's
master limited partnership, is integral to the portfolio. Headquartered
in Houston, the company has 14,400 employees committed to safety and
operating excellence. Phillips 66 had $55 billion of assets as of
June 30, 2018. For more information, visit www.phillips66.com
or follow us on Twitter @Phillips66Co.

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This news release contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which are intended to be covered by the safe harbors created
thereby. Words and phrases such as "is anticipated," "is estimated," "is
expected," "is planned," "is scheduled," "is targeted," "believes,"
"continues," "intends," "will," "would," "objectives," "goals,"
"projects," "efforts," "strategies" and similar expressions are used to
identify such forward-looking statements. However, the absence of these
words does not mean that a statement is not forward-looking.
Forward-looking statements relating to Phillips 66's operations
(including joint venture operations) are based on management's
expectations, estimates and projections about the company, its interests
and the energy industry in general on the date this news release was
prepared. These statements are not guarantees of future performance and
involve certain risks, uncertainties and assumptions that are difficult
to predict. Therefore, actual outcomes and results may differ materially
from what is expressed or forecast in such forward-looking statements.
Factors that could cause actual results or events to differ materially
from those described in the forward-looking statements include
fluctuations in NGL, crude oil, and natural gas prices, and
petrochemical and refining margins; unexpected changes in costs for
constructing, modifying or operating our facilities; unexpected
difficulties in manufacturing, refining or transporting our products;
lack of, or disruptions in, adequate and reliable transportation for our
NGL, crude oil, natural gas, and refined products; potential liability
from litigation or for remedial actions, including removal and
reclamation obligations under environmental regulations; limited access
to capital or significantly higher cost of capital related to
illiquidity or uncertainty in the domestic or international financial
markets; and other economic, business, competitive and/or regulatory
factors affecting Phillips 66's businesses generally as set forth in our
filings with the Securities and Exchange Commission. Phillips 66 is
under no obligation (and expressly disclaims any such obligation) to
update or alter its forward-looking statements, whether as a result of
new information, future events or otherwise.

Use of Non-GAAP Financial InformationThis news
release includes the terms adjusted earnings, adjusted earnings per
share, and adjusted net income. These are non-GAAP financial measures
that are included to help facilitate comparisons of company operating
performance across periods and with peer companies, by excluding items
that do not reflect the core operating results of our businesses in the
current period. This release includes realized refining margin, a
non-GAAP financial measure that demonstrates how well we performed
relative to benchmark industry margins. This release also includes a
debt-to-capital ratio excluding PSXP. This non-GAAP measure is provided
to differentiate the capital structure of Phillips 66 compared with that
of Phillips 66 Partners.

References in the release to earnings refer to net income
attributable to Phillips 66. References to adjusted earnings refer to
earnings excluding special items, as detailed in the tables to this
release. References to net income are inclusive of noncontrolling
interests.

 
        Millions of Dollars
Except as Indicated
2018     2017
       

Jun

    Jun
Q2     Q1    

YTD

Q2     YTD
Reconciliation of Earnings to Adjusted Earnings
Consolidated Earnings $ 1,339 524 1,863 550 1,085
Pre-tax adjustments:
Pending claims and settlements (24 ) (24 )
Pension settlement expense 55 55
Impairments by equity affiliates 33
Certain tax impacts (55 ) (15 ) (70 )
Gain on consolidation of business (423 )
Tax impact of adjustments* 14 3 17 (12 ) 137
U.S. tax reform         24             24          
Adjusted earnings         $ 1,322       512       1,834   569       863  
Earnings per share of common stock (dollars) $ 2.84 1.07 3.87 1.06 2.07
Adjusted earnings per share of common stock (dollars)         $ 2.80       1.04       3.81   1.09       1.65  
 
Reconciliation of Net Income to Adjusted Net Income by Segment
Midstream Net Income $ 202 233 435 96 208
Pre-tax adjustments:
Pension settlement expense 8 8
Tax impact of adjustments*                       (3 )     (3 )
Adjusted net income         $ 202       233       435   101       213  
Chemicals Net Income $ 262 232 494 196 377
Pre-tax adjustments:
Impairments by equity affiliates 33
Tax impact of adjustments*                             (13 )
Adjusted net income         $ 262       232       494   196       397  
Refining Net Income $ 910 91 1,001 224 483
Pre-tax adjustments:
Pending claims and settlements (21 ) (21 )
Gain on consolidation of business (423 )
Certain tax impacts 1 (2 ) (1 )
Pension settlement expense 35 35
Tax impact of adjustments*                       (5 )     157  
Adjusted net income         $ 911       89       1,000   233       231  
Marketing and Specialties Net Income $ 237 184 421 214 355
Pre-tax adjustments:
Pension settlement expense 7 7
Certain tax impacts (56 ) (13 ) (69 )
Tax impact of adjustments*         14       3       17   (3 )     (3 )
Adjusted net income         $ 195       174       369   218       359  
Corporate and Other Net Loss $ (207 ) (155 ) (362 ) (149 ) (279 )
Pre-tax adjustments:
Pending claims and settlements (3 ) (3 )
Pension settlement expense 5 5
Tax impact of adjustments* (1 ) (1 )
U.S. tax reform         24       (7 )     17          
Adjusted net loss         $ (183 )     (162 )     (345 ) (148 )     (278 )

*We generally tax effect taxable U.S.-based special items
using a combined federal and state statutory income tax rate of
approximately 25 percent beginning in 2018, and approximately 38
percent for periods prior to 2018. Taxable special items
attributable to foreign locations likewise use a local statutory
income tax rate. Nontaxable events reflect zero income tax. These
events include, but are not limited to, most goodwill impairments,
transactions legislatively exempt from income tax, transactions
related to entities for which we have made an assertion that the
undistributed earnings are permanently reinvested, or transactions
occurring in jurisdictions with a valuation allowance.

†Weighted-average diluted shares outstanding and income
allocated to participating securities, if applicable, in the
adjusted earnings per share calculation are the same as those used
in the GAAP diluted earnings per share calculation.

   
Millions of Dollars
Except as Indicated
2018
Q2       Q1
Realized Refining Margins
Net income $ 910 91
Plus:
Income tax expense 280 21
Taxes other than income taxes 72 77
Depreciation, amortization and impairments 206 211
Selling, general and administrative expenses 47 41
Operating expenses 869 989
Equity in (earnings) losses of affiliates (214 ) 64
Other segment income, net (19 ) (9 )
Proportional share of refining gross margins contributed by equity
affiliates
    409   227  
Realized refining margins     $ 2,560   1,712  
Total processed inputs (thousands of barrels) 186,257 167,712
Adjusted total processed inputs (thousands of barrels)*     208,395   184,241  
Net income (dollars per barrel)** $ 4.89 0.54
Realized refining margins (dollars per barrel)***     $ 12.28   9.29  

*Adjusted total processed inputs include our proportional
share of processed inputs of an equity affiliate.

**Net income divided by total processed inputs.

***Realized refining margins per barrel, as presented, are
calculated using the underlying realized refining margin amounts,
in dollars, divided by adjusted total processed inputs, in
barrels. As such, recalculated per barrel amounts using the
rounded margins and barrels presented may differ from the
presented per barrel amounts due to rounding.

     
Millions of Dollars
June 30, 2018
Debt-to-Capital Ratio    
Phillips 66

Consolidated

  PSXP*   Phillips 66

Excluding PSXP

Total Debt $ 11,364 2,946 8,418
Total Equity       24,960     2,391     22,569  
Debt-to-Capital Ratio 31 % 27 %
Total Cash       $ 1,884     151     1,733  
Net-Debt-to-Capital Ratio       28 %       23 %

*PSXP's third-party debt and Phillips 66's noncontrolling
interests attributable to PSXP.

 

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