Phillips 66 debuted on the New York Stock Exchange on May 1, 2011, under the ticker PSX. It’s a great old American name that goes back to 1927, when Phillips tested its gasoline on U.S. Highway 66.
PSX is a spinoff from ConocoPhillips. If you held the latter, you got one share of PSX for every two shares of Conoco you owned on May 1.
Spinoffs are my favorite Special Situation for many reasons. In this article, I’d like to focus in on Phillips 66… and the possible opportunity opening up in one of the most-hated businesses around today — oil refineries.
It turns crude oil into useful products like gasoline and diesel.
The stock had a poor debut.
It fell on its first day of trading.
This is not atypical of spinoffs, which are financial castoffs of sorts.
For refineries, too, it’s nothing new for this unloved asset.
Oil companies can’t seem to get rid of them fast enough. They are either closing them down or trying to sell them or spin them off. Consider this snippet from the Financial Times, published in early April:
Half the refining capacity on the populous U.S. East Coast is set to disappear. Sunoco has pulled the plug on two refineries already and warns that another in Philadelphia will close in July if no buyer steps forward. ConocoPhillips is trying to sell a refinery in Pennsylvania, idle since last year. On May 1, it will spin off its refining business. More than 3 million barrels of daily refinery capacity have closed in Western countries since the financial crisis, says the International Energy Agency, the West’s oil watchdog.
Why? The simple reason is that they aren’t making any money. If they are making money, it’s not a return worth the effort.
The reasons for this are complex and varied, but one basic fact is that demand for gasoline has fallen since peaking in 2007. Cars are more fuel-efficient and run on more corn-based ethanol blended in the gasoline. Plus, unemployment is still high, which has an effect on miles driven.
The big killer is oil prices have gone up, but gasoline prices have not matched that increase. You can see this in the so-called crack spread, which is a rough way of measuring the profitability of a refinery. It’s essentially the difference between crude oil (a raw material for the refinery) and refined products (what a refinery winds up selling).
The spreads vary by region. But one reason the East Coast has seen so many refinery closures is that the refiners import the oil. And Brent crude is the price they pay — not West Texas Intermediate. The difference is significant, because Brent is more expensive. The gap is nearly $20 per barrel.
When you look at refinery margins against Brent crude prices, you get a very ugly long-term picture of decline.
In a nutshell, that’s why we have so many refinery closures on the East Coast in particular.
Where is the opportunity?
What’s interesting about this scenario today is that it’s not true around the world. The U.S. and Europe both cast similar shadows. Refineries are closing. Demand for gasoline is falling.
But in emerging markets, the story is very different…
Call them the “BICS” — Brazil, India, China and Saudi Arabia. In the past five years, demand for gasoline from these four has more than offset declines in the West.
This may be the lifeline for U.S. refineries, at least some of them: export product abroad. In fact, this is starting to happen already. Take a look at the chart below.
The U.S. is actually a net exporter of petroleum products (like gasoline). This is a remarkable change. Last year was the first time since 1949 —1949! — that the U.S. exported more gasoline, diesel and other fuels than it imported.
It is also an opportunity. This is why Phillips 66 is an interesting spinoff.
Phillips 66 represents an enormous array of assets:
- 15 refineries
- 10,000 branded gasoline stations
- 86,000 miles of pipeline
- 7.2 billion cubic feet per day of natural gas processing capacity
- Over 40 billion pounds of annual chemicals processing capacity.
This is no small bean, but an energy behemoth. It is now the No. 2 independent refiner in the U.S., behind only Valero.
Phillips has only one refinery in the East Coast region, in New Jersey. (It closed its Pennsylvania facility.) This New Jersey refinery is only 12% of its capacity. Most of its capacity is on the Gulf Coast. About 25% is in the central part of the country, where crude oil prices are lowest.
CEO Greg Garland says Phillips 66 plans to double its exports in the next two years. The company already exports about 100,000 barrels per day of refined products (mostly gasoline and diesel) to overseas markets. Most of its capacity will flow through the Gulf of Mexico. It can export to Europe and Latin America and get better prices than it does at home.
This is part of a larger trend. Energy research firm Wood Mackenzie, taking into account similar plans from other U.S. refineries, says U.S. fuel exports overall will probably double by 2015.
As for Phillips 66, I’d expect the shares to drift downward in its opening weeks, as is typical for spinoffs. Most people will probably keep Conoco and sell PSX. Conoco is in the more-exciting and profitable business of finding and producing oil. The selling pressure will stay with Phillips 66, but not for more than a few weeks at most, I would guess. After that, odds are good PSX will outperform, as spinoffs often do, as people begin to appreciate the opportunity it has as an exporter.
Phillips 66 (PSX) is one to watch.
Sincerely,
Chris Mayer
Source:Â Daily Resource Hunter
