Phillips 66 : Value analysis (profitability by segment)

Created from the spinoff of conoco philipps here is the company description from their web site.

Description
Phillips66 is built on more than 130 years of experience, Phillips 66 is a growing energy manufacturing and logistics company. We rene and market petroleum products, such as gasoline, diesel, jet fuel and lubricants; gather and process natural gas and natural gas liquids (NGL) for powering businesses, heating homes, cooking and electricity; and manufacture petrochemicals, polymers and plastics found in cars, electronics and other everyday goods. This diverse portfolio enables Phillips 66 to capture opportunities in a changing energy landscape.

Part 1 : CPChevron

Phillips 66’s Chemicals business is conducted through a 50 percent equity investment in CPChem, a joint venture with Chevron. 
CPChem is one of the world’s top producers of ole-ns and polyole-ns and a leading supplier of aromatics, alpha ole-ns, styrenics, specialty chemicals, plastic piping and polymer resins.

This business have income before taxes related to Phillips66 ownership (50%) of around 1.2B dollars per year.  It is growing rapidly (from 2009 to 2012).  We have seen a drop in production in the last quarter but we could still calculate full year at about the same profit before tax at around 1.2B for 2013 and more than that for the following years.  In our evaluation we will use the conservative estimate of 10X Earnings before tax for a business including a no-growth valuation.  In this case, it gives us a value close to 12B for Phillips66 ownership in Chemical joint venture CPChevron.

Part 2 : MidStream

MidStream business is created from Philipps 66 own assets and a joint venture.  It is a transportation business.  The assets owned only by Phillips66 comprise more then 18000 km of pipelines and 55 terminals.  By its joint venture with Sprectra Energy (DCP Midstream) owns more than 62000km of pipelines, 62 processing plants and 12 NGL frationnator.  While I do not have a deep understanding of all those assets, it seems huge.   Anyhow, let’s check the value of MidStream business.

The last years of the midStream business were not happy days.  The business lost money on many quarters and started to make profit at around 150m per quarter for a total of 0.6B a year.  In our valuation we’ll use half of this expected profit to cover for those bad quarters (last year) and get to around 3B value for this MidStream business.

Part 3: Refining

One of the largest refiner in the united states and around the world, philipps66 have a wide coverage to every oïl types.  variances between WTI, Brent or other oïl type should not be an issue accepting that one plant will get the disadvantage to compensate the advantage of the other plant.  Revenues are between 4 and 5 Billion a year pretax for 2011 and 2012.  This major profit is offset by a loss in 2010 of close to 2 billions.  I’ll assume the lowball profitability in our valuation at 4B per year giving us a 40B valuation for this business segment.

Part 4: Marketing and specialities

This is the fuel pump business and lubricant business.  It is the “visibile” part of Phillips66 company to the consumer market.  It represents about a small profition of the overall valuation having naviguated from 900M to 700M earnings before tax in the last years.  It is comprised of over 10000 service locations across the world.  This portion of the business could well be sold to an independant operator (ex: Alimentations Couche-tard) in the following years.  Let’s assume a 7B value (lowball) to the Marketing and specialities business.

Estimated value

Chemical  +12B
MidStream +3B
Refining +40B
Marketing and specialities +7B
Total: 62B

For sure we got to offset those for the corporate expenses at another 10X before taxes.  It removes around 3B in the valuation but we evaluated every business at the lowball value so I’ll assume by evaluation is OK at 62B.

What is the current company value?

Market cap 38.14B
Debt  29.8B
– Cash (4B)
Total : 63,94B

Assuming low-ball valuation, Phillips66 seems fairly valuated at the current price.

Disclosure: Authors have a long position in PSX.

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