The Country Caller discusses whether or not the stock represents an attractive investment opportunity following recent declinesWhy Phillips 66 Lost Its Momentum?Is Phillips 66 A Lucrative Investment?
While most energy companies struggled to keep their ship afloat, Phillips 66 (NYSE:PSX) managed to post strong financials last year. As a result, the stock surged 12.59% on the back of lower crude prices, as this meant lower feedstock costs and better refining margins.
Since 2016 started, Phillips 66 has lost some momentum in shares. During the first two months, the stock declined 3.19%. The Country Caller explores the reason for this decline and explains whether or not it is the right time to invest in it.
Why Phillips 66 Lost Its Momentum?
One of the key reasons for the company’s poor performance was the shrinking refining margins as a consequence of increased crude prices. Even in 4QFY15, Phillips 66 saw a steep decline in refining margins as oil price declined from $21.44 a barrel in 3QFY15 to $12.72.
As long as oil price keeps on increasing, refining margins would shrink and hence profits would get hurt. In addition, gasoline inventory has also been in surplus in the US. With gasoline supply exceeding demand, prices would are likely to remain suppressed. The Energy Information Administration (EIA) stated that gasoline price would decline from $2.43 per gallon last year to $1.89 this year.
In 2015, gasoline demand was also high, which contributed to the company’s positive performance. Moreover, fuel-efficient cars and environment-friendly vehicles led gasoline demand to decline though, adding to the company’s worries as the stock posted poor performance compared to last year.
Is Phillips 66 A Lucrative Investment?
One reason to invest in Phillips 66 is its diversified business portfolio. As lower refining margins continue to impact profitability, its investment in other segments continues to reap profits.
For example, olefin products such as 1-octane, 1-butene, 1-hexene, etc have positive future demand. The company can take advantage of high demand of these products owing to its integrated business model. An important point to note here is that the company is making strategic investments in segments which present positive long-run upside potential for the organization.
Another example includes its petrochemicals project in the US, at the Gulf Coast. The project is nearing completion, and is expected to come online by mid-2017. This project would enhance Phillips 66’s polyethylene and ethylene capacity by almost 40%.
In addition, the company has a healthy liquidity position. At the end of 2015, it had operating cash flow worth $5.7 billion, along with $4.8 billion in cash. Its debt is less than $9 billion, which means it has the capability to honor its debt easily with its strong cash position. Any improvement in refining margins would mean further upside potential for company. Phillip 66 stock has gained 7.16% year-to-date (YTD), suggesting that it represents a lucrative investment opportunity right now.