Strategically Envisioning A Greener Future Through Innovative Energy Solutions And Financial Resilience

Key Takeaways

• Transition to producing renewable fuels at the Rodeo Renewable Energy Complex aims to meet growing demand for environmentally friendly energy options.
  
• Emphasis on cost reduction, asset monetization, and shareholder returns through repurchase programs and increased dividends to improve financial performance and stability.
  
• Delays in the Rodeo Renewable Energy Complex and fluctuations in the refining market may negatively impact margins, revenue, and operational costs.

Catalysts

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

• The completion of the Rodeo Renewable Energy Complex and its shift to producing renewable diesel and sustainable aviation fuel will enhance revenue by tapping into the growing demand for lower carbon intensity fuels.
  
• Phillips 66 plans to achieve significant run rate cost reductions across its operations, specifically targeting over $560 million in savings, which will positively impact net margins by reducing operating and SG&A expenses.
  
• Asset monetization efforts, including the divestiture of the retail marketing business in Germany and Austria, aim to generate over $3 billion in proceeds that could be used to support strategic priorities and return cash to shareholders, potentially boosting earnings per share.
  
• The ongoing share repurchase program and a 10% increase in the quarterly dividend, contributing to a compound annual growth rate of 16% since 2012, signal strong capital return to shareholders, expected to support an increase in earnings per share.
  
• Improvements in Midstream operations with a focus on capturing operating and commercial synergies over $400 million by year-end 2024 promise stable cash generation, which will strengthen the company’s ability to fund capital allocation priorities, enhancing overall financial stability and shareholder value.

Assumptions

• Analysts are assuming Phillips 66's revenue will decrease by -6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.4% today to 4.1% in 3 years time.
• Analysts expect earnings to remain at the same level they are now, that being $5.1 billion (with an earnings per share of $13.46). However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $5.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2027 earnings, up from 10.8x today. This future PE is greater than the current PE for the US Oil and Gas industry at 10.4x.
• Analysts expect the number of shares outstanding to decline by 3.33% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

Risks

• Delays or issues in the ramp-up of the Rodeo Renewable Energy Complex could lead to continued or additional losses beyond the $180 million loss in adjusted pretax income in the first quarter, negatively impacting net margins.
  
• If the transition to lower carbon intensity (CI) feedstocks at Rodeo Renewable Energy Complex encounters delays or increased costs, projected margins from renewable fuels production might not meet expectations, affecting the company's revenue and earnings.
  
• Fluctuations in West Coast refining market capture and clean product yield, as well as potential volatility in WCS (Western Canadian Select) pricing, may lead to variability in refining margins, impacting revenue.
  
• The strategic divestiture of international marketing assets (e.g., in Germany and Austria) is subject to market conditions and customary approvals. Any delays or lower-than-expected proceeds could impact the company's financial strategy and operating cash flows.
  
• A sustained or increased level of operational expenditures (OpEx), including from the Rodeo conversion, without corresponding improvements in efficiencies or reduction in costs through business transformation initiatives, could pressure operating margins across the refining and renewable fuels segments.

Valuation

• The analysts have a consensus price target of $143.45 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 $167.0, and the most bearish reporting a price target of just $122.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $123.7 billion, earnings will come to $5.1 billion, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 7.7%.
• Given the current share price of $131.43, the analyst's price target of $143.45 is 8.4% 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.