Phillips 66 profits fall on refining loss

HOUSTON — Profits for oil refiner Phillips 66 dove 67 percent in the third quarter as its refining business fell to a $2 million loss, the company reported Wednesday.

A year ago, the Houston refining and midstream giant collected $1.5 billion in net income from refining, then its most profitable business as the boom in U.S. oil production sent domestic crude costs far lower than such expenses on the global market.

The difference between the cost of crude and the price tag on refiners’ petroleum products has dropped 40 percent over the past year, squeezing refining margins, the company said.

Phillips 66 saw $535 million in net income in the third quarter, compared to $1.6 billion a year ago. Its revenue edged up over the same period last year to $44.8 billion from $43.9 billion.

Prices for several petroleum products stayed flat as crude prices rose, making the refining market more challenging than it has been in the past two years, said Chairman and CEO Greg Garland during a conference call with investors Wednesday morning.

“Refining is, was and always will be a volatile landscape,” he said.

The margin squeeze hit the company hardest on the West Coast and in the  central U.S., where it has refineries in Montana, Oklahoma and the Texas Panhandle, said Greg Maxwell, Phillips 66′s chief financial officer.

When an analyst asked the Phillips 66 executives whether they might consider selling some refining assets in those regions, Garland said the company likely will keep them on the books.

“The focus is, how do we grow midstream and chemicals rather than how do we shrink refining,” Garland said.

Midstream and chemicals

The company’s chemical segment drove earnings in the quarter, climbing 71 percent to $262 million in the third quarter on higher sales of olefins and polyolefins, chemicals used in plastics, paints and household appliances.

Margins for the company’s midstream business climbed to $148 million, up from a $72 million loss in the same period a year ago. The company’s DCP Midstream segment jumped to $136 million from $62 million in the third quarter of 2012.

Garland pointed out Phillips 66 in the third quarter directed spending to its midstream and chemicals sectors and gave $800 million back to shareholders in dividends and share repurchases. It also took $1.1 billion from asset sales and paid off $510 million in debt during the quarter.

The company is planning on a $2.5 billion to $3 billion capital budget for 2014, he said.

Wall Street expectations

At 87 cents, the company’s earnings per share fell below polled analysts’ expectation, 94 cents, according to Thompson Reuters.

Wall Street’s earnings-growth expectations for energy companies have sunk below every other major industry in the third quarter, with Exxon Mobil and Phillips 66 contributing the most to an expected decline in profits, according to a recent report by FactSet.

In oil and gas, the refining and marketing sector is expected to be the second-worst performer, and analysts forecast the sector’s earnings to decline 74 percent in the third quarter, according to FactSet.

Phillips 66 Partners

Phillips 66 took home $404 million in proceeds after it spun off a master limited partnership, Phillips 66 Partners, in July. Investors bought 26.3 percent of the MLP, which owns some of Phillips 66’s transportation and terminal assets.

The newly minted partnership reported $17.3 million in third-quarter net income on Wednesday, up from $11.9 million in the same period last year. Its revenues climbed 39 percent over the year to $29.6 million in the three months ended Sept. 30.

Garland said in a written statement the partnership is looking into the market for merger and acquisition potential.

“With considerable financial flexibility and strong sponsorship from Phillips 66, the partnership is well positioned for significant growth,” he said.

Phillips 66 shares were up less than 1 percent at $64.48 per share in early trading Wednesday.