Phillips 66 shifts focus with $3 billion in new projects

Phillips 66 is no longer betting its future on the massive refining business that made it the second-largest energy company in the world.

Instead, it’s using refining, once its most profitable arm, as a cash cow to transform itself into a business that primarily operates energy transportation, storage and processing infrastructure.

On Friday, Phillips 66’s board of directors approved a $3 billion investment in two facilities 60 miles south of Houston:

  •  A new fractionation facility in Old Ocean will separate natural gas liquids into chemicals used in plastics manufacturing and other industries. That plant could process 100,000 barrels of natural gas liquids per day by next year.

Combined, the two Brazoria County facilities would create 50 permanent jobs in southeast Texas, Phillips 66 says.

“They’re building a new foundation for the company,” said Fadel Gheit, an analyst with Oppenheimer & Co.

Expansion: Phillips 66 plans 40 percent hike in annual spending

Phillips 66 spun out of Houston oil producer ConocoPhillips in 2012 and, among energy companies, remains second only to Exxon Mobil in revenue.

Still, Phillips 66’s midstream projects probably will be dwarfed by other energy companies’ facilities along the Gulf Coast.

Enterprise Products Partners is slated to build liquefied petroleum gas terminals with four times the capacity of Phillips 66’s facility. And Kinder Morgan is planning to partner with Targa Resources to expand its fractionation capacity in the Gulf Coast to 400,000 barrels per day.

The three companies, like Phillips 66, are based in Houston.

Seventy percent of Phillip 66’s $4.6 billion capital budget will go toward its midstream segment this year, while it plans to spend $1 billion for the upkeep of its refining assets, said Phillips 66 spokesman Dean Acosta.

“The reason is pretty simple: Shareholder value,” Acosta said.

The shift comes as natural gas and its products have become abundant and cheap in the United States.

Midstream-sector operators rose from obscurity to become the stars of the energy industry after a surge in U.S. oil and gas production spurred demand for new pipelines, storage and other facilities.

Photos: Phillips 66 breaks ground on new Houston headquarters

For decades, midstream energy companies dragged behind giant integrated oil companies and smaller producers, but midstream’s share of the oil and gas industry’s overall market value has tripled.

The many miles of pipeline and other new facilities cost the midstream sector $26 billion in 2012, a steep climb from just $7 billion six years earlier, according to Deloitte.

The international accounting firm estimates that midstream companies could spend $200 billion by 2035 on fitting the U.S. with new infrastructure.

Meanwhile, the oil and gas refining business has created headaches at Phillips 66 and on Wall Street. It can move quickly from feast to famine. The company’s refining profit hit a high of $1.5 billion in the third quarter of 2012, only to lose $2 million in the same period the next year.

The profit and the loss followed unpredictable swings in the difference between international and U.S. crude benchmark prices.

That’s why Phillips 66 is “reinvesting in a more stable business with more consistent cash flows, and that will probably give them a higher valuation in the future,” said Jeff Dietert, an analyst at Houston investment banking firm Simmons & Co.

Phillips 66 shares rose 98 cents to $74.28 in New York Stock Exchange trading Friday.


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Refineries expanded, but not constructed