Phillips 66 (PSX)

[Enterprising Investor]

Phillips 66 Is Unlocking More Shareholder Value (5/09/15)

As management takes steps to refashion the oil refiner, shares could double.

Gusher! Shares of Phillips 66 have rallied 14% this year, to $81, versus a 3% return from the Standard & Poor’s 500 index. A gain of 15% could lie ahead in coming months, with higher returns thereafter.

Evercore ISI believes that Phillips (ticker: PSX) is worth $90 a share, based on modest expansion in its price/earnings ratio to 12.8 times “normalized” 2015 estimated earnings of $7 a share. Deutsche Bank puts the sum of its parts at $95.

Shares yield 2.7%, and the oil refiner just announced a 12% increase in its quarterly dividend.

As oil touched a low in January, Barron’s saw a bargain (“Get Your Kicks With Phillips 66,” Jan. 19). Investors worried that refining, which accounts for 60% of Phillips’ earnings, would be hurt as the price advantage of cheap U.S. crude briefly vanished versus European Brent. But Brent prices again are trading above West Texas Intermediate, the U.S. benchmark, restoring the attraction of Phillips’ refined products.

In the first quarter, Phillips’ refining operating earnings jumped 61% from a year earlier, beating expectations. Earnings from marketing products at the gas stations bearing the company’s iconic logo climbed 41%. But all is not rosy: A collapse in the price of natural-gas liquids slashed profits in the chemicals and refining units.

To focus on quarterly earnings is to miss the bigger picture, however. CEO Greg Garland is refashioning Phillips into an operator of infrastructure for the transport, storage, and processing of energy—all more profitable activities than refining. Many Phillips assets are expected to be put into Phillips 66 Partners (PSXP), a relatively young master limited partnership that will eventually pay a sizable yield. Management also has indicated it might spin off assets in coming years to realize value.

“More than most companies, this management has a plan,” says Craig Shere of Tuohy Brothers Investment Research. “They’ve stated many times that the market underestimates the substantial value of their midstream and CPChem growth projects.” CPChem is its chemical unit.

At the Ira Sohn Investment Conference last week, Daniel Dreyfus of 3G Capital described the charms of Phillips, saying it could earn $10 a share a few years hence, versus a consensus estimate of $6.70 in 2015, as it grows chemicals and midstream. At 12 to 15 times 2017 earnings, the stock could trade for $120-$150.

-- Leslie P. Norton

http://online.barrons.com/articles/phillips-66-is-unlocking-more-shareholder-value-1431136551

The spinoff value of PSX was $33.96.