OREANDA-NEWS. Phillips 66 (NYSE: PSX), an energy manufacturing and logistics company, announces third-quarter earnings of USD 535 million, compared with earnings of USD 1.6 billion in the third quarter of 2012. Adjusted earnings were USD 1.9 billion in the same period last year.

"We ran well during the quarter," said Greg Garland, chairman and CEO of Phillips 66. "Weaker refining margins had a significant impact on our earnings. Chemicals posted strong earnings as a result of solid utilization rates and good margins."

"We're reinvesting in our businesses while increasing shareholder distributions. We continue to capitalize on the rise of North American energy production, focusing investment in the rapidly growing midstream and chemicals sectors. This quarter, we returned more than USD 800 million of capital to our shareholders through dividends and share repurchases. Earlier this month, we completed our initial USD 2 billion share repurchase program, began share repurchases under our additional USD 1 billion program and announced a 25 percent increase in our dividend," said Garland.
 
Midstream

The Midstream segment generated earnings of USD 148 million in the third quarter of 2013, compared with a loss of USD 72 million and adjusted earnings of USD 88 million in the same period last year.

Phillips 66’s Transportation business generated earnings of USD 54 million during the third quarter of 2013. In the same period of 2012, Transportation recorded a loss of USD 128 million and adjusted earnings of USD 32 million. The USD 22 million increase from the prior year's adjusted earnings was mostly due to improved margins resulting from higher throughput fees, as well as increased volumes.
 
Third-quarter earnings related to the company’s equity investment in DCP Midstream were USD 87 million, USD 48 million higher than in the third quarter of 2012. This increase was partially due to gains resulting from the issuance of units by DCP Midstream Partners, LP. In addition, earnings benefited from improved margins and higher volumes.

Earnings from NGL Operations and Other were USD 7 million for the quarter, compared with USD 17 million in the same period last year. This decrease was primarily related to lower margins and inventory impacts.

Chemicals

Third-quarter 2013 Chemicals earnings, which reflect Phillips 66's equity investment in Chevron Phillips Chemical Company (CPChem), were USD 262 million. During the same period last year, Chemicals generated earnings of USD 153 million and adjusted earnings of USD 275 million. Higher costs and lower volumes in the third quarter of 2013 were partially offset by improved margins in Olefins and Polyolefins (O&P), primarily related to increased polyethylene prices. Earnings from Specialties, Aromatics and Styrenics were consistent with the same period last year.

Global utilization for O&P was 87 percent during the quarter. Utilization rates improved compared with the second quarter of 2013.

Equity earnings from CPChem's joint ventures contributed USD 75 million to Phillips 66’s pre-tax Chemicals earnings during the third quarter.

Refining

Refining reported a third-quarter loss of USD 2 million, compared with earnings of USD 1.5 billion in the third quarter of 2012. The decrease was primarily due to lower realized refining margins, driven largely by an approximate 40 percent decline in the average worldwide market crack spread. Realized margins also decreased due to tightening crude differentials, particularly in the Gulf Coast, Central Corridor and Western/Pacific regions.

Refining earnings were USD 483 million lower than the second quarter of 2013. The decline in earnings primarily reflects weaker worldwide market crack spreads and lower earnings from the utilization of excess capacity on certain pipelines driven by narrowing Canadian crude spreads.

The company's Refining segment continued to incur increased costs for Renewable Identification Numbers (RINs) under the Environmental Protection Agency's Renewable Fuel Standards Program. To the extent these costs are not captured in the selling price of motor fuels, realized refining margins are reduced.

During the quarter, 66 percent of Phillips 66’s U.S. crude slate was advantaged, compared with 63 percent in the same period last year. This increase was largely a result of processing an additional 110,000 barrels per day of shale oil, as well as higher volumes of heavy Canadian crudes.

Phillips 66’s worldwide refining utilization was 95 percent in the third quarter, and worldwide clean product yield was 84 percent.

Marketing and Specialties (M&S)

Third-quarter earnings for M&S were USD 240 million, an increase of USD 142 million from the same quarter last year. The segment benefited from higher margins and decreased costs. M&S margins improved compared with the third quarter of 2012 primarily due to higher RINs values associated with renewable fuel blending activities. This more than offset weaker underlying U.S. marketing margins in the third quarter of 2013. International marketing experienced strong results reflecting higher realized margins.

Phillips 66’s Specialties businesses generated USD 45 million in earnings, compared with USD 52 million during the same period last year. The decrease was due to lower specialties margins, partially offset by improved volumes and lower costs.

M&S sales volumes improved in the third quarter of 2013 compared with the same period last year.  Worldwide marketing volumes rose by 77,000 barrels per day. Refined product exports totaled 186,000 barrels per day in the third quarter, up from 89,000 barrels per day in the same period last year. Volumes from the company’s lubricants business increased by 15 percent.

Corporate and Other

Corporate and Other costs were USD 113 million after-tax for the quarter, compared with USD 125 million of costs and USD 112 million of adjusted costs in the third quarter of 2012.

Financial Position, Liquidity and Return of Capital

During the quarter, Phillips 66 generated USD 1.9 billion of cash from operations, USD 1.1 billion in proceeds from asset dispositions and USD 404 million in net proceeds from Phillips 66 Partners' initial public offering. Excluding changes in working capital, operating cash flow was USD 873 million.

The company funded USD 412 million in capital expenditures and investments. In addition, Phillips 66 repaid the remaining USD 500 million of its amortizing three-year term loan. This resulted in USD 6.2 billion of debt at the end of the quarter, including capital leases entered into during the period. By quarter's end, the debt-to-capital ratio improved to 22 percent.

Phillips 66 also returned USD 863 million of capital to shareholders in the third quarter. The company paid USD 189 million in dividends and repurchased 11.6 million shares of common stock for USD 674 million.

As of Sept. 30, 2013, cash and cash equivalents were USD 5.9 billion. Phillips 66 reported a year-to-date annualized return on capital employed (ROCE) of 15 percent, and a year-to-date annualized adjusted ROCE of 14 percent.

Strategic Initiatives

Phillips 66 continues to focus on growing its Midstream, Chemicals, and Marketing and Specialties segments, while enhancing refining returns by capturing opportunities created through the rise of oil and gas production in North America.

In Midstream, as previously announced, the company is advancing development of a 100,000 barrel-per-day NGL fractionator to be located in Old Ocean, Texas. Phillips 66 also expects to build a liquefied petroleum gas (LPG) export terminal in Freeport, Texas, to help meet growing global demand.

In July, Phillips 66 Partners successfully completed its initial public offering of common units, which trade on the New York Stock Exchange under the ticker symbol "PSXP."  Phillips 66 plans to use the master limited partnership as a vehicle to grow its Midstream segment.

By the end of the third quarter, Phillips 66’s Transportation business had taken delivery of 1,270 of its 2,000 railcar order, which can be used to transport advantaged crude to the company's refineries.

During the quarter, DCP Midstream began commercial operation at the 75 million-cubic-feet-per-day Rawhide Plant, part of its Permian Basin expansion program. In October, DCP Midstream Partners, LP began commercial operation at its O'Connor Plant located in the Denver-Julesburg Basin. The facility, formerly known as the LaSalle Plant, has initial capacity of 110 million cubic feet per day.

In October, CPChem's board of directors approved the U.S. Gulf Coast (USGC) Petrochemicals Project. The world-scale project includes a 3.3 billion-pounds-per-year ethane cracker and two polyethylene facilities, each with an annual capacity of 1.1 billion pounds. The ethane cracker will be built at CPChem's Cedar Bayou Plant in Baytown, Texas, and the two polyethylene units will be built in Old Ocean, Texas, near its Sweeny Facility. The project is expected to start up in 2017. CPChem's 1-hexene project, also at Cedar Bayou, is anticipated to start up during the first half of 2014.

Phillips 66 is enhancing returns by increasing its refineries' access to advantaged feedstocks, as well as improving refined product export capabilities at its coastal refineries. The company has received the necessary permits for a rail offloading facility at its Ferndale Refinery, which is expected to have the capability to offload 30,000 barrels per day of crude oil. Additionally, during the quarter, the company began construction of another rail offloading facility at its Bayway Refinery with anticipated capability of 75,000 barrels per day. Both facilities will enable the refineries to access additional advantaged crudes and are expected to be operational in the second half of 2014. In total, the company has the capacity to export approximately 340,000 barrels per day from its domestic refineries. Over the next several years, Phillips 66 expects to increase its export capability to 500,000 barrels per day.

Phillips 66 intends to expand its fuel marketing business in Europe, as part of its plan for selective growth in the Marketing and Specialties segment. Over the next five years, the company expects to build approximately 200 new retail sites, which will market motor fuels under the JET® brand.

Consistent with the company's intent to grow shareholder distributions, Phillips 66 had repurchased 34.2 million shares of common stock totaling approximately USD 2.0 billion as part of its initial share repurchase program, leaving 600 million shares outstanding at the end of the third quarter. In July, the company's board of directors authorized another USD 1.0 billion of share repurchases and in October declared a USD 0.39 per share dividend payable in the fourth quarter. This represents a 25 percent increase in the quarterly dividend.