Refining and midstream company Phillips 66 said it underperformed in the second quarter as its earnings dropped 19 percent because of higher costs for oil and outages that shut down key facilities.
The Houston-based refiner reported a net income of $958 million in the three months ending June 30, down from $1.2 billion in the same period a year ago.
The drop in earnings came as the company’s facilities suffered dramatically more downtime than expected, in one case because of two power outages during the quarter. Phillips 66 also paid higher prices for oil and earned less for its refined products. As a result, the company’s earnings from refining fell 47 percent, to $481 million, compared with a year ago.
Phillips 66: Phillips 66 Partners makes strong debut on NYSE
“We should have run better and our earnings results reflect this,” CEO Greg Garland said in a conference call with analysts.
Phillips 66’s adjusted earnings per share of about $1.50 was well below analyst expectations of about $1. 81 for that figure.
The company’s extended downtime at its facilities, including a refinery and a chemical plant, contributed to $175 million in lost profit, executives said. One of the outages, an extended maintenance period at a chemical plant in Port Arthur, lasted for 91 days, the duration of an entire quarter of the year.
Garland said that two power outages at the company’s Sweeny refinery in Old Ocean, Texas, were a major problem.
“We had a second power outage in the second quarter and in my view that’s unacceptable,” Garland said.
The refinery is powered both by an on-site generation facility and by a power company. The power company was the cause of the two outages, Garland said.
“To me, personally, the biggest disappointment in the quarter was having a second power outage at Sweeny,” he said.
Other factors contributed to the company’s declines, however, including higher domestic oil prices that pushed down profits. The gap between the price of West Texas Intermediate, a benchmark for domestic crude, and Brent, a measure of international oil prices, narrowed substantially during the second quarter. That trend is expected to continue through the remainder of the year, with Brent currently around $107 and WTI at about $105.
U.S. refiners had previously enjoyed a huge advantage over their foreign competitors because WTI prices were as much as $20 lower than Brent prices , with some U.S. crudes priced far lower because there was limited access to foreign markets.
As pipelines and railways have moved more of that cheap oil to regions where they compete directly with international crude, the price gap has narrowed.
“We’re moving towards a more normalized crude pricing environment,” said Jeff Dietert, and analyst for Simmons & Co. International.
But Phillips 66 will retain an advantage over other companies because it has moved quickly to develop its rail and other oil transportation efforts so that it can more easily move around cheaper oil to its refineries, Dietert said.
“Phillips 66 has been an early mover on adding logistical infrastructure to improve its flexibility of taking lower cost domestic crudes to refineries across its portfolio and this flexibility we believe will lower their feedstock costs over the long run,” Dietert said.
Garland said Phillips 66 had progressed in adding new rail capacity for moving oil, a tactic that the company is employing in several regions. Phillips 66 in January signed a five-year deal valued at about $1 billion to move about 50,000 barrels of crude mainly by rail from the Bakken shale play in North Dakota to its Bayway refinery in New Jersey. That effort is one of several Phillips 66 is pursuing related to moving oil by rail.
“By the end of the second quarter we have taken delivery of 650 rail cars of the 2,000 that we’ve ordered,” Garland said. “These cars will be used to transport advantaged crude to Phillips 66 refineries on the east and west coasts.”