NGL, Midstream And Refining Upgrades Will Shape Future Success

Key Takeaways

• Transformational growth, acquisitions, and refining enhancements aim to boost revenue, earnings stability, and margins, supporting strategic Midstream EBITDA goals.
  
• Effective capital allocation with share repurchases and dividend growth indicates focus on sustainable EPS growth and competitiveness.
  
• Challenging macro conditions and strategic shifts may pressure margins and net income, while reliance on Midstream poses risks to earnings stability.

Catalysts

Operates as an energy manufacturing and logistics company in the United States, the United Kingdom, Germany, and internationally.

• Phillips 66 is executing on transformational growth opportunities like enhancing its NGL value chain and achieving growth in Midstream, which could drive revenue growth and earnings stability.
  
• The company is improving its refining operations through low-capital, high-return projects, enabling better feedstock flexibility and yield, which can boost net margins.
  
• Acquisitions like EPIC NGL are expected to be immediately accretive, providing fee-based earnings growth and supporting the company’s plan to grow Midstream EBITDA to $4.5 billion by 2027, positively impacting earnings.
  
• Strategic divestments and rationalization in the Refining segment are expected to improve competitiveness and align with demand trends, potentially enhancing long-term margins.
  
• Committed capital returns through share repurchases and a secure, growing dividend demonstrate effective capital allocation, likely supporting EPS growth through reduced share count.

Phillips 66 Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Phillips 66's revenue will decrease by 3.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 4.3% in 3 years time.
• Analysts expect earnings to reach $5.2 billion (and earnings per share of $13.42) by about September 2028, up from $1.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $7.0 billion in earnings, and the most bearish expecting $4.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, down from 31.3x today. This future PE is lower than the current PE for the US Oil and Gas industry at 12.6x.
• Analysts expect the number of shares outstanding to decline by 2.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.45%, as per the Simply Wall St company report.

Phillips 66 Future Earnings Per Share Growth

Risks

• The challenging macro environment in Refining, Renewables, and Chemicals could negatively impact Phillips 66's revenue and net margins.
  
• Turnaround programs, while improving refining capabilities, have caused disruptions and higher costs, potentially affecting near-term earnings.
  
• The decision to cease operations at the Los Angeles Refinery by the end of 2025 introduces accelerated depreciation costs, impacting short-term earnings.
  
• The transition from blenders tax credits to production tax credits and associated uncertainties in Renewable Fuels could further pressure margins and net income.
  
• Heavy reliance on Midstream for stable cash flow means any disruptions or regulatory changes could significantly impact earnings stability.

Valuation

• The analysts have a consensus price target of $136.579 for Phillips 66 based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $158.0, and the most bearish reporting a price target of just $127.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $120.0 billion, earnings will come to $5.2 billion, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 7.4%.
• Given the current share price of $132.29, the analyst price target of $136.58 is 3.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.