Phillips 66 (PSX) Shares 'Too Undervalued'; Will Pop on U.S. Exposure, Midstream - Barron's
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Phillips 66 (NYSE: PSX) shares are indicated for a lower open Monday despite a bullish report in Barron's over the weekend.
Since splitting from ConocoPhillips (NYSE: COP) last week, shares are down 11.6 percent to about $30 each and down even more from a close of $37 on April 13th when shares began trading on a "when-issued" basis.
One analyst from ISI Group said the company is being valued like a refiner, but the market appears to be forgetting it gets about 40 percent of top-line growth from "high-return" chemical and midstream businesses.
Phillips has 11 domestic refineries with a total capacity of 1.8 million barrels per day. Debt is about $6 billion, it has a good credit rating, and overall solid balance sheet.
Though Phillips' valuation -- currently at seven times next year's earnings expectations -- is in-line with other refiners, but investors have been discounting the group based on margin expectations. Margins widened over the last few years with refiners having access to cheap "mid-continent" crude, which may not always be the case moving forward.
On chemical and midstream ops, the 40 percent contribution stems from the segments ability to generate about 30 percent of returns...double that of what refining draws. Chemicals have been profitable due to 80 percent U.S. exposure, where lower gas prices keep input costs down. The segment reported $1.8 billion in profit for 2011. As for midstream, Barron's noted there is expansion potential due to the boom in U.S. energy production.
Finally, Phillips is also in partnerships with Chevron (NYSE: CVX) and Spectra Energy (NYSE: SE), both of which appear to be lucrative deals.
Barron's said spin-offs typically produce "outsized" returns, with Phillips slated to be the next big thing.
Since splitting from ConocoPhillips (NYSE: COP) last week, shares are down 11.6 percent to about $30 each and down even more from a close of $37 on April 13th when shares began trading on a "when-issued" basis.
One analyst from ISI Group said the company is being valued like a refiner, but the market appears to be forgetting it gets about 40 percent of top-line growth from "high-return" chemical and midstream businesses.
Phillips has 11 domestic refineries with a total capacity of 1.8 million barrels per day. Debt is about $6 billion, it has a good credit rating, and overall solid balance sheet.
Though Phillips' valuation -- currently at seven times next year's earnings expectations -- is in-line with other refiners, but investors have been discounting the group based on margin expectations. Margins widened over the last few years with refiners having access to cheap "mid-continent" crude, which may not always be the case moving forward.
On chemical and midstream ops, the 40 percent contribution stems from the segments ability to generate about 30 percent of returns...double that of what refining draws. Chemicals have been profitable due to 80 percent U.S. exposure, where lower gas prices keep input costs down. The segment reported $1.8 billion in profit for 2011. As for midstream, Barron's noted there is expansion potential due to the boom in U.S. energy production.
Finally, Phillips is also in partnerships with Chevron (NYSE: CVX) and Spectra Energy (NYSE: SE), both of which appear to be lucrative deals.
Barron's said spin-offs typically produce "outsized" returns, with Phillips slated to be the next big thing.
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