While downstream energy specialist Phillips 66 (NYSE:PSX) carries obvious relevancies for the undergirding of American infrastructure, its market value has failed to generate much traction so far this year. However, a surprise move by the Organization of the Petroleum Exporting Countries and non-member oil-producing countries – an alliance known as OPEC+ – may offer benefits for the company. I am bullish on PSX stock.
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Specifically, TipRanks reporter Sirisha Bhogaraju stated that “oil prices jumped after Saudi Arabia and other OPEC+ producers announced surprise output cuts of around 1.16 million barrels per day (bpd). Reacting to the cuts that start in May and last till the end of this year, a U.S. National Security Council spokesperson said, ‘We don’t think cuts are advisable at this moment given market uncertainty – and we’ve made that clear.’”
Further, Saudi Arabia – which is slashing production by 500,000 bpd – called the move “a precautionary measure aimed at supporting the stability of the oil market.” Other oil-producing giants like Iraq, United Arab Emirates (UAE), and Kuwait also joined in with six-digit bpd cuts.
Following the announcement, the major equity indices ended the Monday session mixed. While the Dow Jones Industrial Average (DJIA) and the S&P 500 index (SPX) moved up modestly, the technology-centric Nasdaq 100 (NDX) declined by 0.25%. More than likely, higher energy costs will negatively impact the ongoing delicate recovery from the COVID-19 pandemic.
However, for PSX stock, the OPEC+ cuts may be exactly what the doctor ordered.
PSX Stock Insulates Itself from the Federal Reserve
Geopolitically, the significance of the oil cartel’s decision focuses on international respect for U.S. policymakers — or lack thereof. While most eyes trained on the Federal Reserve regarding the trajectory and stability of the dollar, the Middle East-led OPEC+ reminded everyone that the U.S. does not impose an exclusive and comprehensive hegemony on global economic affairs.
Nevertheless, the ball now rests in the Fed’s court, which explains the pensiveness in the equity indices. For several months, Fed Chair Jerome Powell signaled to the American people that the central bank must do what it can to curb inflation; otherwise, the economy might suffer severe, longstanding pain. Therefore, Powell implemented interest rate hikes under the philosophy of supporting the greater good.
However, because of the OPEC+ disruption, Powell must consider becoming even more aggressive with his hawkish monetary policy. After all, lower energy supplies mean greater demand, which is inflationary. Still, the beauty of PSX stock is that it may perform well, irrespective of policy decisions.
For example, let’s assume that Powell stays true to form and implements more rate hikes. While that may be deflationary for PSX stock on paper, the underlying enterprise literally fuels this nation. Therefore, Phillips 66 enjoys inelastic demand. No matter the price fluctuation, people will consume a minimum baseline of hydrocarbons.
Naturally, if the Fed decides to do nothing or implement a dovish approach, PSX stock will benefit organically. Again, the underlying company enjoys inelastic demand. Even with skyrocketing prices, people still need their fuel.
Enticing Financials Also Undergird Phillips 66
Another factor that should boost PSX stock is that irrespective of the OPEC+ narrative, Phillips 66 brings an attractive financial profile to the table. For example, the company enjoys decent stability in its balance sheet, supported by an Altman Z-Score (a solvency metric) of 4.11. This stat reflects low bankruptcy risk over the next two years.
Operationally, Phillips 66 features a three-year revenue growth rate (on a per-share basis) of 14.9%. Here, the company outpaces nearly 66% of competitors in the oil and gas industry. Also, its EBITDA growth rate during the same period is 39.3%, blowing past 79.39% of sector rivals.
Lastly, PSX stock could be undervalued. Currently, the market prices shares at a trailing multiple of 4.48 times. This ranks better (lower) than 71.45% of its peers.
Is PSX Stock a Buy, According to Analysts?
Turning to Wall Street, PSX stock has a Moderate Buy consensus rating based on six Buys, four Holds, and zero Sell ratings. The average PSX stock price target is $129.22, implying 25.9% upside potential.
Supporting the bull case, on TipRanks, PSX stock has a ‘Perfect 10’ Smart Score rating. This indicates strong potential for the stock to outperform the broader market from here.
The Takeaway: PSX Stock Stands Ready for Whatever Happens Next
Fundamentally, the production cuts that OPEC+ imposed represent an obvious tailwind for PSX stock. However, the broader concern focuses on the Fed and its monetary policy response. Still, whatever the central bank decides, Phillips 66 should be insulated from the shock. Therefore, the downstream energy specialist represents an ideal investment based on the circumstances.
