VLO - Phillips 66: This 4.8% Refinery Yield Is A Bargain

• Phillips 66 is a diversified, growing company in the energy sector.
• The company has attractive long-term prospects for dividend growth.
• Phillips 66’s stock is trading at a reasonable 8x forward earnings multiple.

After a 25% valuation drop in June, the dividend and yield of oil company Phillips 66 ( PSX ) are too attractive to pass up. Phillips 66, with its big and diverse portfolio of energy assets, is an appealing long-term dividend growth option that appears to be extremely cheap at the moment.

Phillips 66 is an integrated firm with midstream and chemicals holdings, as well as branded outlets selling refined petroleum products, providing solid diversification. Phillips 66 stock pays an almost 5% dividend and trades at a very affordable earnings multiple of 8x.

Profitable Energy Business With ROCE Upside

Phillips 66 is a fully integrated energy business with properties located throughout the United States. The company's global portfolio comprises 22K miles of pipeline systems, a 50% equity stake in DCP Midstream, 28 chemical production facilities (through a joint venture), refining facilities, and 8,810 marketing and specialty outlets.

Phillips 66, a major energy corporation in the United States with a market value of about $40 billion for its outstanding shares, is an essential player in the energy industry that benefits society as a whole through its logistics and distribution services.

Phillips 66 is invested in the four mentioned above core businesses: midstream, refinery, chemicals, and marketing/specialties. The refining business is the most asset-heavy, accounting for 37% of total assets. Midstream (27%) is the second-largest segment, followed by Marketing and Specialties (18%), and Chemicals (11%). Phillips 66's Chemicals investments include a 50% equity stake in Chevron Phillips Chemical Company LLC ((CPChem)), which manufactures and markets petrochemicals and polymers globally.

Phillips 66 had a strong first quarter of the year, despite the resumption of depressed energy demand following Covid-19. With $396 million in profit, the Chemicals division delivered the largest profit slice. Marketing and Specialties made $316 million in profits, while Phillips 66's midstream assets made $242 million.

Adjusted EBITDA Rebound

Energy companies, such as Phillips 66, invest heavily in infrastructure in order to sustain profit-generating activities and expand capacity. Because this demands a big amount of capital, resulting in large depreciation expenditures that skew earnings figures, energy companies tend to focus on adjusted EBITDA rather than earnings.

Phillips 66 gained from rising energy demand in 2021, resulting in an increase in adjusted EBITDA last year. With the exception of 2020, Phillips has experienced strong profitability across the board, with adjusted EBITDA averaging $6.2 billion between 2017 and 2021.

With the exception of the 2020 stress period, which resulted in Phillips 66's chosen capital return measure (ROCE=return on capital employed) falling to just 1%, the average adjusted yearly EBITDA is $7.3 billion.

Between 2018 and 2021, Phillips 66's deployment of energy assets generated an average return on capital employed of 9%, which is somewhat higher than the industry average. A 9% return, which is not bad at all, places PSX squarely at the crossroads of the Midstream and Chemical industries, both of which produce returns of at least 8%.

P/E-Multiple Looks Attractive Given The Yield

Phillips 66 stock is trading at an 8x forecast earnings multiple, which is a very reasonable multiple given the company's 4.9% stock dividend.

Valero Energy Corporation ( VLO ) and Marathon Petroleum Corporation ( MPC ) are competitors. Both firms have P/E ratios that are comparable to Phillips 66. Phillips 66's earnings multiple has reduced by nearly 25% as a result of valuation haircuts applied to refinery equities in June.

Phillips 66 increased their dividend by 5% in May, bringing it to $0.97 per share. Since 2012, Phillips has been dedicated to increasing the dividend. Since the company's first dividend payment of $0.20 per share in 2012, the payout has increased by 17% every year to $0.97 per share.

Why Phillips 66 Could See A Lower Stock Price

A 2020-style slump in the energy markets would not sit well with Phillips 66, and a significant drop in the ROCE measure could be expected. Phillips 66, being an integrated corporation with a diverse portfolio of energy assets, will be less vulnerable to a recession than upstream enterprises.

However, the company's earnings and ROCE are expected to fall as the economy weakens, thus reducing dividend increases at Phillips 66.

My Conclusion

Phillips 66 is a long-term gamble on the U.S. energy industry and rising demand for the company's refined petroleum and specialized goods.

And PSX is a very appealing gamble in this regard, as the company's stock trades at only an 8x forward earnings multiple.

Phillips 66 promises long-term dividend growth and a highly appealing stock yield of 4.9%.

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