Facing falling oil prices and a possible slowdown in oil production, Phillips 66 has shelved plans for two projects aimed at processing the glut of oil unleashed by the U.S. shale boom.
Months after the company applied for a permit to build a new condensate splitter, the project has been placed on the back burner for at least a year until prices recover, company officials said Thursday during an earnings call with investors.
The delay underscores the ongoing ambiguity surrounding the rules regarding exporting condensate, an ultra-light oil unlocked from shale, said Colton Bean of Tudor, Pickering, Holt & Co.
A decades-old ban prevents companies from sending shipments of crude overseas, but in confidential rulings last year, the Commerce Department’s Bureau of Industry and Security said two companies — Enterprise Products Partners and Pioneer Natural Resources — could export condensate after distilling it and separating into various components. Other companies have clamored for more clarity, but the agency has not issued further guidance.
Phillips 66 on Thursday also said it will similarly push back plans for a second fractionator, which separates natural gas liquids into its component parts. The first fractionator, under construction at the company’s Sweeny refinery, is slated to start operations later this year.
The Houston-based refining, pipeline and chemicals company said it remains committed to its slate of projects, including the nearly complete fractionator and a liquid petroleum gas export terminal in Freeport, despite a 37 percent drop in profits in the first quarter.
Although Phillips 66 earned the best refining margins in two years as it took advantage of cheap crude to run its refineries, that wasn’t enough to offset the weak market for natural gas liquids, including falling margins for seasonal propane and butane storage, the company said. Prices for such liquids tend to be tied to oil.
The company on Thursday posted earnings of $987 million, or $1.79 per share, during the three-month period ending March 31. That’s down from $1.57 billion, or $2.67 per share, during the same period last year.
Along with the weakened midstream segment, profits also took a plunge in the company’s chemical sector as a result of falling prices for polyethylene, a component in plastic, and a shutdown for planned maintenance at Chevron Phillips Chemical, in which Phillips 66 owns a 50 percent stake.
The company’s refining business posted strong results despite scheduled maintenance and unplanned downtime at its Alliance refinery in Belle Chasse, Louisiana. That’s because Phillips 66 was able to process low-cost oil into higher-priced productions, capitalizing on spiking gasoline prices on the West Coast.
“(Phillips 66) is a very interesting story,” said Rob Desai, analyst at Edward Jones. “We view them historically as a refiner with some other assets but going forward, as they transition and transform, they will become a midstream and chemicals company with refining assets.”
Against that backdrop, company officials reiterated their commitment to DCP Midstream, a Denver-based pipeline and natural gas processing company that has been hit hard by the crude collapse.
With natural gas liquids fetching lower prices on the market, the company, a joint partnership between Phillips 66 and Spectra Energy, has been undergoing a corporate restructuring. The firm announced plans earlier this year to layoff or relocate 200 jobs as it slashed its corporate budget by 20 percent. DCP Midstream reduced its 2015 capital budget by 56 percent to $800 million.
In response to a question from an analyst, Phillips 66 Chairman and CEO Greg Garland declined to say whether Phillips 66 would inject capital into DCP Midstream to keep it afloat, but said he continues to consider the company a strong asset.
“It’s a must-run business,” he said.