Phillips 66 (PSX) shares are up more than 12% this year, and are expected to trade higher than they are right now for the following reasons.
Before I describe the catalysts, I’m bullish on Phillips 66.
The energy sector is up almost 40% so far this year, which is not surprising as traders have been fully committed to trying to capitalize on higher oil and gas prices amid supply concerns over G7 sanctions on the Russian economy.
As long as these tailwinds continue to push hydrocarbons higher, energy stocks and Phillips 66 are unlikely to halt their uptrends, and the cause of all this, the crisis in Eastern Europe, is not going to end anytime soon.
Phillips 66
Phillips 66 is a diversified energy company as it processes and markets fuels worldwide..
In addition to these products, which come primarily from petroleum refining, the company is active in the natural gas trade and supplies chemicals and specialty products to global markets.
Headquartered in Houston, Texas, Phillips 66 employs approximately 14,000 people, and has an asset base of $56 billion as of December 30, 2021.
Q4 and FY 2021 Results
In the fourth quarter of 2021, the company announced that pro forma earnings were $1.3 billion, resulting in a net income per share of $2.94.
Cash flow generated from operations was $1.8 billion, a notable increase compared to cash flow of $639 million in the year-ago quarter, which prompted the fossil fuel refiner to increase its quarterly dividend by 2.22%.
Arguably the most relevant figure from annual management is the $6 billion in operating cash flow the company has been able to generate, which has allowed it to reduce its debt by about $1.5 billion.
In addition, Phillips 66 has funded various projects, including midstream infrastructure upgrades and the adaptation of some facilities for renewable fuel production.
The company also invested in initiatives to meet the planet’s goal of achieving carbon neutrality within a few decades while exploring the development of clean technologies for fossil fuel refining.
Financial Condition
The financial condition is moderately solid.
As of December 30, 2021, cash totaling $3.15 billion represented just 20% of the total debt amount of $15.52 billion.
After deleveraging and thanks to higher oil and gas prices, the interest coverage ratio has improved to 5.56, suggesting easy payments of interest costs on outstanding debt.
Essentially, Phillips 66’s business is safe, as evidenced by the Altman Z-Score of 3.31.
Oil and Gas Price Outlook
There is no doubt that high oil and gas prices will help Phillips 66 grow.
With the expected increase in air travel as the holiday season approaches, the demand for fossil fuels will increase. This will create an opposite and stronger effect, offsetting the joint plan announced last week by IEA member states and the U.S. for a massive release of reserves totaling 240 million barrels to lower prices. So, crude oil prices are poised for a quick rebound after an expected brief setback.
Analysts estimate that WTI crude oil futures will reach $103 per barrel by the end of Q2 2022, and they also estimate that this will reach $114 per barrel before the end of Q1 2023. These are increases of 7.3% and 18.8% from the current price of $96 per barrel. Year-to-date, crude oil is up almost 30%.
Gas prices are also likely to trade higher on the same factors as crude oil, coupled with added pressure from concerns over a ban on coal imports from Russia by EU countries, and the imposition of an embargo on Russian hydrocarbons.
Another key catalyst for gas prices is the sharp decline in U.S. natural gas inventories (due to the current frosty weather in parts of the U.S.) combined with the increase in U.S. shipments of liquid natural gas to Europe.
Analysts are estimating U.S. natural gas futures to hit $6.92 per million British thermal units before the end of Q1 2023. This is an increase of 6.5% from the current price of $6.5 per million British thermal units. Year-to-date, natural gas is up more than 65%.
2022 Catalyst
Sell-side analysts are forecasting Phillips 66’s earnings to rise a whopping 37.4% in 2022, which could translate to a robust cash flow for the company’s projects and balance sheet.
Those factors should cause the stock price to rise, but the upside potential could be even greater if the company raises its dividend again.
Wall Street’s Take
For the past three months, 10 Wall Street analysts have issued a 12-month price target for PSX. The company has a Strong Buy consensus rating based on eight Buys, two Holds, and zero Sell ratings.
The average Phillips 66 price target is $99, implying a 17.9% upside potential.
Stock Statistics
Shares with a market cap of $40.4 billion, a P/E ratio of 28.5, and a 52-week range of $63.19 to $94.34.
The stock has a price-book ratio of 2.77, a price-sales ratio of 0.44, a price-cash flow ratio of 6.1 and a price-free cash flow ratio of 16.4.
Dividend
Phillips 66 paid a quarterly dividend of $0.92 per common share on March 1, 2022, and December 1, 2021. The company paid a quarterly dividend of $0.90 per common share on September 1, 2021, and June 1, 2021.
As a result, its 12-month dividend is $3.64 per common share, which translates to a 4.38% yield today.
Conclusion
Technically, the stock isn’t cheap, but it’s worth considering shares as there is strong growth potential.
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