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James Barrow Is Proved Right, and You Should Follow in His Steps

April 28, 2014 | About:

Rising tensions in Europe have added an extra condiment to the oil and gas market. Gas supplies have been mostly unaffected by political events throughout the last decade. Only the world economic crisis was able to have an impact on the sector. Unlike the oil sector, gas has escaped the war stories associated with the first since 2001. Nonetheless, politics manage to disturb yet another industry. That is, Russian intentions in Ukraine have the potential to disrupt current market conditions. So far, the Kremlin has assured European consumers the stability of supplies. A disruption of distribution operations, or a preferred treatment for Ukraine, will certainly have an impact on gas prices. What follows is the opening of opportunities to other gas-related companies with operations in Europe. Phillips 66 (PSX) is one important refining company, with an eye set on midstream activities.

Adjusting Model on the Back of Success

Analysts have been issuing positive reviews on Phillips 66 since December of last year. “Hold” ratings have turned into “Buy,” and the price target continued climbing. Tudor Pickering, UBS and Barclays have all recommended purchasing the stock during the last month. Moreover, the average target price has surpassed the $90 mark, a value expected to be reached in the next quarter. Most important, S&P expects operating income in 2014 to reflect lower costs and operating efficiencies, with earnings per share estimates of $6.54 in 2014 and $6.86 in 2015.

For fiscal year 2013, Phillips 66 returned $3 billion of capital to shareholders through dividends and share repurchases, while ranking among the top performers in safety compared to peers and integrated majors. Moreover, decisions were made to strengthen the balance sheet, and $1 billion of debt in 2013 was repaid, reducing total debt to about $6 billion. True, total sales fell behind 2012, taking revenues and earnings per share down with it. But, the capitalization program and business expansion and rebalancing holds the key to growth.

Phillips 66’s management announced approval reception for the construction of the Sweeny Fractionator One and Freeport Liquefied Petroleum Gas Export Terminal, both in Texas. The first will supply purity natural gas liquids (NGL) products to the petrochemical industry and heating markets. The second will leverage Phillips 66 midstream, transportation and storage infrastructure to supply petrochemical, heating and transportation markets globally. These two projects represent an investment of more than $3 billion as part of the company’s Midstream growth program.

Absorbing Market Synergies

The strategy set by Phillips 66 to achieve growth entails a rebalancing of the business model towards the higher-return midstream and chemicals segments, while making targeted growth investments in marketing and specialties. Deliveries of advantaged oil is increasingly using rail and new facilities are underway, to safely handle more volatile oil coming from new locations. In line, agreements have been reached with third-party providers to add an extra 1,200 railcars in 2014 to further increase deliveries of advantaged crude to refineries in California.

In the long term, Phillips 66 will benefit from a positive economic environment, and growing activities for the sector. Most important, management is set on improving returns and profitability through the sale of underperforming assets, increasing cost-advantaged feedstock processing and increasing exports. That will be compounded by a reduction of refining activities, expected to represent only 30% by 2017. Supported by an improved profitability, as the midstream and chemicals segment take over.

Currently, Phillips 66 trades at 13.9 times its trailing earnings, just shy of the industry average. More, it pays $0.39 in quarterly dividends, representing a 1.70% annual yield. Also, a strong balance sheet with improving debt-to-cash ratio and operating margin continues to tempt gurus. James Barrow (Trades, Portfolio) is the guru holding the largest position, acquired during 2012, soon after the company came into being. That is the last needed evidence of the company as a prospective long-term investment.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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