An Independent Evaluation of Phillips 66, its Business Strategy, and Execution
by Hugh Pickens
On May 1, 2012 ConocoPhillips split into two separate publicly-traded companies: an upstream company that will retain the name ConocoPhillips and concentrate on exploration and production, and a downstream company, to be named Phillips 66, that will include refining and marketing (R&M), chemicals, and midstream business segments. The refinery in Ponca City, with over 700 employees the single largest employer in Ponca City, is part of the R&M segment and will go into Phillips 66. Phillips 66 will be a publicly traded company (PSX) and a number of independent financial analysts will be following the company. The purpose of this web site is to also follow Phillips 66 and document and discuss the company's plans and policies with an emphasis on understanding Phillips 66 business decisions and their impact on the community of Ponca City.
Some of the conclusions reached after analysis of publicly available information on Phillips 66 include the following:
- The Refining and Marketing Business Segment will be more important to Phillips 66 than it was to ConocoPhillips.
- The Refinery in Ponca City will be more important to Phillips 66 than it was to ConocoPhillips.
- The Refining and Marketing Business Segment is the least profitable Business Segment and will be de-emphasized with unprofitable refineries closed or sold off.
- There will be a reduction in the capital allocated to the Refining and Marketing Segment.
- Although Phillips 66 sold the Trainer refinery on May 1, 2012 and is trying to sell the Alliance refinery, the refinery in Ponca City is unlikely to be closed or sold for at least three to five years as margins have been strong in the Mid-Continent Segment and are expected to remain high for the medium term.
- Profits are presently very high for the Mid-Continent refineries of which the refinery at Ponca City forms a part. But these profits are due to the glut of crude oil pouring into the region from newly tapped shale oil like North Dakota’s Bakken and these high profits are not expected to persist for more than three to five years.
Ponca City and the Oil Industry
Marland finds Oil in 1911
Over the past 100 years, Ponca City's history has been shaped for the most part by the ebb and flow of the petroleum industry. E. W. Marland came to Ponca City in 1908 and drilled his first successful well, Willie Cries, in 1911. Marland originally founded the 101 Ranch Oil Company, located on the Miller Brothers 101 Ranch, and drilled his first successful oil well on land which he leased in 1911 from the Ponca Tribe.[1]
Marland Oil Founded in 1917
Marland Oil Company was founded in 1917, when Marland assembled his various holdings including the 101 Ranch Oil Company into one unit, forming Marland Oil Company. Later, on January 3, 1921 Marland incorporated the Marland Oil Company in Delaware to acquire through an exchange of stock control of the Marland Refining Corp. and Kay County Gas Co. By 1920 it is estimated that Marland and his partners controlled 10% of the worlds oil production (the equivalent of Saudi Arabia in 2006) and that Marland was worth $85 million.[2]
According to an article appearing in Petroleum Age in 1922, the refinery in Ponca City was already one of the largest refineries in the world by 1920:
Located in the heart of the Mid-Continent oil field, the greatest known light oil field in the world, by 1920 the company controlled, with its subsidiaries, over 200,000 acres of proven and valuable oil land within a radius of 100 miles from Ponca City, the headquarters of the company. A study of the map of Marland properties in Northern Oklahoma proves easily the strong strategic position the company holds through its oil resources and large reserves in some of the best pools of this district. Marland oil opened in 1920 the famous Hickman, or now better known as Burbank pool, in the Western Osage; in 1921 the Tonkawa pool in Noble County, within fifteen miles of Ponca City, which promises to produce large quantities of high-gravity crude. It controls almost entirely the Ponca field, one of the oldest and best producing fields in the Mid-Continent, with five producing sands; holds large parcels of oil and gas lands in the Eastern and Western Osage fields, in the Garber, Noble, Newkirk, Deer-Creek and in the Pawnee Payne district. Marland draws its crude from eighteen producing fields with 244 wells and produces, with its affiliated companies, the Comar and Alcorn Oil Companies, over 12.000 barrels per day, sufficient crude for its own refinery demand. Pipe lines extending 271 miles, with thirteen modern equipped pumping stations, radiate in three directions from Ponca City and connect Marland's two refineries with oil fields which have ample unmined production to supply sufficient crude oil for many years to come. The company operates in Ponca City a 10,000-barrel complete refinery, and at Covington a 1,000-barrel skimming plant producing a well-known brand of high grade gasoline and lubricating oils. Nearly two million barrels of steel storage for crude and finished products give the company a strong position in the market, and enabled Marland to begin the storage of gasoline when the refinery price was as low as 12-1/2 cents. The recent raise, totaling so far 3 cents per gallon has greatly increased the value of the 250,000 to 300,000 barrels gasoline the company keeps i» storage against the coming summer demand.[3]
By 1922 nearly 600 Marland stations were found in 11 mid-continent states, from North Dakota to Oklahoma and as far east as Indiana. Growth required capital, however, and Marland was continually strapped. Turning to investment banker J.P. Morgan and Company, Marland was able to secure financial backing for continued expansion, but with expansion came a hefty price. By 1928 Marland had been forced out by Morgan interests who placed former Texaco executive Dan Moran in charge. With orders from Morgan and Company to put Marland Oil back in the black, Moran set out to acquire key assets that would round out the Marland operation, allowing for increased financial stability. With this in mind, Marland management began to look around for a partner, a company with complementary assets, an operation that would perhaps consider a merger.[4]
Marland's exploitation of oil reserves generated growth and wealth that were previously unimaginable on the Oklahoma prairie, and his company virtually built the city from the ground up. Mansions—including the Marland Mansion and Grand Home—were built by Marland and his associates. The "Roaring 20s" came to an end for Ponca City shortly before the Great Depression. After the takeover bid by J.P. Morgan Jr., son of financier J.P. Morgan, Marland Oil Co. merged with Continental Oil Co. (Conoco) in the late 1920s.[1] It was known as Conoco for more than 70 years. The company maintained its headquarters in Ponca City until the 1950s and continued to grow into a global corporation.[5] Marland was later elected the governor of Oklahoma and as a U.S. congressman.
Conoco Oil Company Acquires Marland in 1929
Conoco Inc. was an American oil company founded in 1875 as the Continental Oil and Transportation Company. Based in Ogden, Utah, the company was a coal, oil, kerosene, grease and candles distributor in the West. Marland Oil Company (founded by exploration pioneer E. W. Marland) later acquired the assets (subject to liabilities) of Continental Oil Company, for a consideration of 2,317,266 shares of stock. On June 26, 1929, Marland Oil changed its name to Continental Oil Company and moved its headquarters to Ponca City, Oklahoma. The acquisition gave Conoco the red bar-and-triangle logo previously used by Marland. Conoco used the logo between 1930 and 1970, when the current red capsule logo was adopted. Ponca City remained the world headquarters of Conoco until the 1950s when the headquarters moved to Houston.
Dupont Acquires Conoco in 1981
In 1981, in what was called the largest acquisition in US history at that time, Conoco was purchased by DuPont Company, headquartered in Wilmington Deleware, over the July 4 weekend for $9.7 billion. At the time of the acquisition, DuPont announced that $2 billion in Conoco assets would be sold to reduce Conoco's debt. Dupont began by selling a west coast refinery for $100 million and a group of domestic properties were sold to Petro-Lewis for $750 million. At the time of the acquisition, Conoco was by far Ponca City's biggest employer with 828 employees at the refinery and an additional 3,805 employees working in support services including financial, research,engineering, and service organizations.[6] Thirty years later only the refinery employees remain.
Environmental Settlement with Conoco in 1990
The NY Times reported in 1990 that Conoco had reached one of the largest settlements ever recorded at that time in a lawsuit over environmental contamination offering 400 families that are neighbors to the Conoco refinery a package of measures worth from $23 million to $27 million, according to various estimates that will allow them to move away "from the acrid odors that have come to signify sickness and death in many households." Conoco executives said the settlement would permit them to create an uninhabited buffer zone around the plant. "We didn't do this for the money, and people are not going to have a good time spending it," said Anna Sue Rafferty, a leader of Ponca City Toxic Concerned Citizens, a community group that helped organize the suit against Conoco. "This has been my home for 34 years. I raised four children here. I love this house, but all I want to do now is get out of it." In response to years of complaints, Federal and state officials along with Conoco executives repeatedly told the plant's neighbors that no toxic substances were evident and that they faced no health risk. But recent tests performed by Conoco on samples of water found underground showed traces of benzene, a known carcinogen, according to Dennis Parker, the refinery manager. Adrienne Anderson, Western regional director of the National Toxics Campaign, which provided technical assistance to people in the area, said privately commissioned tests on water that had seeped into basements regularly showed dangerous levels of benzene, arsenic and about 20 other potentially harmful chemicals. Conoco, a fully owned subsidiary of E. I. du Pont de Nemours & Company, did not acknowledge any wrongdoing in the settlement. In a statement Monday, Mr. Parker noted that the agreement says, "No party admits any fault, liability or responsibility for any claims, injuries or damages claimed by any adverse party." Grace Klinger, who learned the chemistry of hydrocarbons to find out what was happening in her neighborhood, said: "When I was growing up, everyone just figured the stink was just refinery stink and if the company said it was O.K. then it was O.K. Now we know better, and it doesn't matter what Conoco says because the truth is out."[7][8]
Major Downsizing of Conoco in 1993
Ponca City was hit by major downsizing at Conoco in 1993 when approximately 1,400 jobs were cut, resulting in an annual payroll reduction of $40 million. This precipitated an economic slowdown in the city and county in 1993 and 1994. The unemployment rate, which had always been well below the national average of six percent, jumped to 12 percent and unemployment compensation claims more than doubled from the previous year. While Conoco once accounted for 50 percent of the jobs in Ponca City, after the downsizing Conoco accounted for just seven percent, or 1,400 jobs. According to a study by the International Economic Development Council, "the town’s psychology and identity was rocked by the downsizing of its one major employer."[9]
DuPont Sells Off Stake making Conoco Independent in 1998
The NY Times reported in 1998 that in a move that many investors believe was long overdue, DuPont announced that it would divest itself of 20 percent of its $22 billion Conoco oil subsidiary in a tax-free stock offering that could bring in as much as $5 billion. Charles O. Holliday Jr., DuPont's chief executive, said he would dispose of the rest of Conoco "as soon as practical." DuPont bought Conoco in 1981 as insurance against the pricing and supply tactics of the Organization of Petroleum Exporting Countries. But oil prices have been far less volatile than it had feared, and DuPont continues to de-emphasize the petrochemical side of its business, so having Conoco as a captive source of raw material is of less strategic importance.[10] A successful road show kicked into gear to sell Conoco to the investment community, culminating in the largest IPO in history, nearly $4.4 billion. Many financial analysts were skeptical the deal would be pulled off, given tremendous upheaval in both the oil and stock markets and a dried-up appetite for public offerings. But company personnel, from top executives to support people, worked countless hours to make the IPO a success. On October 22, 1998, their efforts paid off: Conoco stock began trading again, using a new symbol, "COC," honoring the name it had held for so many years - Continental Oil Company.[11]
A Merger of Equals Between Conoco and Phillips in 2001
Conoco Inc. and Phillips Petroleum Co. announced on November 18, 2001 that their boards of directors have unanimously approved a merger of equals. The companies said they have signed a definitive merger agreement. The merged company became the third-largest integrated U.S. energy company based on market capitalization and oil and gas reserves and production. Worldwide, it became the sixth-largest energy company based on hydrocarbon reserves and the fifth-largest global refiner. Upon completion of the merger, Archie W. Dunham, Conoco chairman and chief executive officer, would serve as chairman of ConocoPhillips and delay his scheduled retirement to 2004. James J. Mulva, Phillips chairman and chief executive officer, would become president and chief executive officer of the combined company, and also become chairman upon Dunham's retirement.[12][13]
The Associated Press reported that analysts described the combination as a deal done to survive. If Phillips and Conoco hadn't decided to join forces, analysts said they risked losing market share to competitors in an unhealthy business climate for all but the largest petroleum companies reported Alan Clenndenning. "This is absolutely a matter of survival - survival nor necessarily to thrive, but to guarantee they will survive, said Fadel Gheit, an analyst at Fahnestock & Co. In a conference callwith analysts, top Phillips and Conoco officials said the merger would allow them to save at least $750 million annually in part through the elimination of an unspecified number of jobs from the company's combined roster of 58,000 employees. "You cannot say you are cutting cots if you cut less than 5 percent, said Gheit. "And if you want to be aggressive with a sharp knife you can cut 15 to 20 percent, which I see as unlikely." Officials took pains to describe the deal as a merger of equals, tough under its terms, Phillips shareholders wil end up with a 56.6 percent stake in the new company.[14]
Businessweek reported in 2005 chief executive officer Mulva had conceived the bold $16 billion deal that created ConocoPhillips in 2002 that vaulted it into the league of energy giants so large they're called supermajors and was an aggressive risk-taker willing to place multibillion-dollar bets in the most volatile places on earth. All of the industry's big players are swimming in cash, reported Businessweek but Mulva is plowing some 70% of the company's expected cash flow back into the business, compared with 60% at Chevron Corp. and 35% at Exxon Mobil Corp.. "We're aggressive about where we want to be five years from now," said Mulva. "Even with the benefit of hindsight, Mulva has done a lot right," wrote Mark Morrison. "His aptly timed Conoco acquisition put the company in a position to benefit from a new global dynamic of rising energy demand that could last into the next decade. And his bold plans may ultimately prove that he adjusted more wisely and quickly to the changing world of energy than the other majors. Right or wrong, no one will accuse Mulva of being shy."[15]
According to Jim Mulva's presentation to financial analysts on July 14, 2011, ConocoPhillips' view was that the company needed to go up in size. That is one of the reasons for the merger -- to compete around the world. "We also felt, looking back 10 years ago, that there is going to be consolidation in the industry. And that made a lot of sense that we were pretty bullish about oil prices and we feltthe supply and demand situation of oil would get tighter with time."[16][17]
Impact of Merger of Conoco and Phillips on Oklahoma Communities
See KOCO. "Phillips-Conoco Merger Stuns Bartlesville" November 19, 2001.[18]
ConocoPhillips Closes Demonstration Plant in Ponca City in 2005
On October 21, 2004 ConocoPhillips announced that it would shut down its demonstration plant eliminating up to 120 jobs. The plant was built to test technology designed to convert natural gas into liquid fuels. "It isnever easy tomake this kind of announcement," said George Paczkowski, ConocoPhillips vice-president of downstream technology in Ponca City, "but we've known this demonstration plant was temporary since we built it. The plant was scheduled to close in July, 2005 eliminating 80 full-time positions and 40 contract jobs. Paczkowski said many of the full-time workers would be reassigned to other positions at the company.[19]
ConocoPhillips Relocates 700 Jobs from Ponca City in 2009
On November 7, 2008 ConocoPhillips announced that the company was planning to downsize their operation in Ponca City and that all 700 office worker positions in Ponca City were being for relocated to Bartlesville or Houson. On November 8, 2008 ConocoPhillips first announced that all 700 office worker positions in Ponca City are being considered for consolidation or relocation. "Consolidation and relocation are options we're looking at," said company spokesman Tracy Harlow. "Any and all options are still on the board right now." Most of ConocoPhillips' nonrefinery jobs in Ponca City werefocused in the credit card, information technology, facilities and other support operations, she noted. A steering committee, including ConocoPhillips managers, was looking at options. The review started November 2008 and had not narrowed into specifics so far, Harlow said. The 750 people employed in refinery operations would not be affected by the review.[20]
The Tulsa World reported on February 17, 2009 that ConocoPhillips had decided to relocate all of its 750 non-refinery positions out of Ponca City within two years and that first 250 jobs will be moved in 2009 with 180 jobs going to Houston and 70 jobs to Bartlesville. The positions moving first include jobs in technical services, research and development, engineering and support, human resources and Internet technology, among others. Management met with hundreds of Ponca City employees to tell them the news. "It’s a difficult time in general for all ConocoPhillips employees," said ConocPhillips spokesman Tracy Harlow. ConocoPhillips originally planned the Ponca City relocation study as a standalone effort in 2008 but falling energy and credit markets forced ConocoPhillips to consider layoffs and include Ponca City into its overall business efficiency study. "We made the strategic decision to consolidate locations for the most effective corporate operations,” Harlow said. “Obviously we are conserving cash right now, so cash will limit relocations in 2009.”[21]
Business Week reported that Ponca City took a hit from ConocoPhillips in February 2009, when the company said it planned to move 750 non-refinery jobs out of the city of about 26,000 to Bartlesville and Houston. But the refinery has remained a key part of ConocoPhillips' operations, said ConocoPhillips spokesman John Roper. Rich Cantillon, president and CEO of the Ponca City Chamber of Commerce, said ConocoPhillips upgraded the refinery last year and is performing another upgrade this year. No new oil refineries have been built in the U.S. since 1976, which is another positive sign for the Ponca City facility's future. "It's not going anywhere," Cantillon said. "We are good to go. Ponca City is a happy, good community. ... It's fascinating to see how (the split) will all play out, but we'll always have the refinery. There won't be any more job loss for Ponca City when it comes to (ConocoPhillips). There could be job growth."[22]
City officials were disappointed in ConocoPhillips' announcement that 750 jobs will be relocated from Ponca City, but expect the community to bounce back. "We would have liked to have seen them expand here. We have plenty of office room for them and had hoped they would grow their operation here," said City Manager Craig Stephenson. "We also understand it's a corporate decision." Mayor Homer Nicholson said Conoco has been a good corporate citizen and he is glad ConocoPhillips has decided to leave Oklahoma's largest refinery in Ponca City. "We are thankful," he said. "We were hoping the business optimization study would give them a reason to expand their business in Ponca City. Unfortunately, that did not happen," Nicholson said. "We have weathered larger reductions in force than this one," the mayor said.[23]
Effect of the 2009 Downsizing on Ponca City
The Tulsa World reports that Conoco employed more than 5,000 people in Ponca City before the oil bust of 1985, the year Dave Myers, executive director of the Ponca City Development Authority, pinpoints as "the beginning of the end for us being a company town." The end itself came in 2002, when Conoco merged into ConocoPhillips and began transferring departments en masse to the Phillips campus in Bartlesville. In November 2009, the company announced it would probably transfer the final 700 office jobs out of Ponca, leaving only 750 jobs in the refinery.
Until a few months ago, Fred Holmes worked in research and development with more than 100 other technicians. Then he and his wife had to choose between early retirement or transferring to Bartlesville, an hour and 20 minutes east of Ponca. "It was a 12-hour day any way you look at it," Holmes says. "She couldn't put up with it then, and I didn't want to do it now." After a few weeks, his wife quit the company and invested in a downtown bridal shop, Affairs to Remember. Now Holmes works there, too — recently moving the shop to a larger storefront and adding a catering service. But Homes still resents the company for, as he puts it, "abandoning Ponca City." While he had a small business to fall back on, Holmes has watched friends and co-workers move away to look for jobs elsewhere. "You used to be able to wake up in the morning and know you had a job and know that your family would be provided for," he says. "Now, nobody knows what's going to happen next."
Mike Dove took early retirement when the company moved his entire department to Bartlesville. When he grew up during the '60s, a job with the company seemed like "the ultimate prize," Dove says. Like many of his classmates, Dove went off to college not to escape Ponca City, but so he could come back and stay. "You could pretty much count on a job for life, and it gave you a sense of security and stability. "By the '90s, that wasn't the case at all." For his own two children, both now adults, staying in Ponca City was never an option. "Finding a job," Dove says, "pretty much means going somewhere else."[24]
KOCO reported on November 7, 2008 that City development executive director David Myers said the diversity of the economy would lessen the effect of possible job losses. "The impact of this economically is not nearly as severe as the impact emotionally," said Myers adding that city leaders didn't want to depend on a single employer that could make or break the community and that other employers also make up a big portion of the economy. "Sensor testing is a $6 billion worldwide industry, and we're the only place in the world where you come and have your sensor tested by a neutral third party," Myers said. "Our real concern is with the individual families that might be impacted by this, and we want to make sure that there are some viable alternatives for them to stay here in Ponca City because most of them do want to stay here," Myers said. Barber Barney Barnwell said he has been in this situation before and so has the community. "We can survive," he said. "Ponca can survive."[25]
Possible Sale of Ponca City Refinery in 2010
In May 2010, there was a lot of discussion in Ponca City about the possibility that ConocoPhillips was interested in selling its Ponca refinery to another oil company and getting out of Ponca City especially after ConocoPhillips Chairman and CEO Jim Mulva met with corporate analysts in October 2009 for the ConocoPhillips Q3 2009 Earnings Call and announced that the company's capital budget would decrease by about 12 percent in 2010 and that ConocoPhillips planned to divest $10 billion in refining, exploration, and production assets in a bid to improve its financial position.[26]
At the earnings call on October 29, 2009 Mulva was asked specifically about the possibility that ConocoPhillips might divest itself of some of its refineries and Mulva said that the company was "going through a more strategic assessment [of its refineries] because there are some that are less sophisticated. We will think long-term when the market gets a little bit better about selling some refineries. We think that is going to be subsequent to the next two years for 2012, 2013 and we have in mind a number of facilities that we think might have some value to someone else."[27]
The Tulsa World and the Bartlesville Examiner-Enterprise report that Mulva appeared before a packed house at the Bartlesville Community Center on May 21, 2010 to present the annual company update, talk about ConocoPhillips' plans for the future, and clarify the company's plans for Bartlesville and for the Ponca City refinery.[28]
Mulva told his audience that employees in Bartlesville and Ponca City have little to fear. Although ConocoPhillips announced last year that it was tranferring or eliminating all 700 non-refinery jobs in Ponca City, ConocoPhillips plans to keep the Ponca City refinery with it's 750 employees. "We will retain only the largest and most sophisticated refineries," Mulva said. "Ponca City is a large and sophisticated refinery that is important to our refinery portfolio."[29]
Mulva added that he didn't forsee any change in the 3,100 ConocoPhillips employees in Bartlesville, and that there was actually room to accommodate an additional 800 to 1,000 more employees in Bartlesville. "There's no change in our long-term plans for Bartlesville," Mulva said. "It's a very important global support center for ConocoPhillips."[30]
"Ponca City Still a Competitive Refinery"
The announcement reinforced a statement made in February 2009 at the time that the announcement was made that ConocoPhillips non-refinery employees in Ponca City would be relocated over the next three years. "The refinery in Ponca City continues to be a competitive refinery," said John A Carrig, President and Chief Operating Officer of ConocoPhillips, when he talked to students as part of the Distinguished Speaker Series at the Michael F. Price College of Business at Oklahoma University. "Like all of our facilities, we are continuing to make investments to enable it to thrive. I don't see any particular change in the outlook for it."[31]
Jim Mulva reiterated in his conference call to financial analysts on July 14, 2011 that in answering a question by Ed Westlake of Credit Suisse that "if we have an alternative to sell one of the less sophisticated refineries in a way, we are not going to delay until this is done accomplishing and doing that."[16][17]
Creation of Phillips 66
Rationale for the ConocoPhillips Split
There are two ways to look at the decision to split off the downstream segment from ConocoPhillips with the creation of Phillips 66. According to Christopher Helman writing in Forbes magazine the ConocoPhillips’ split can be seen as the upstream guys seizing an opportunity to jettison their lower-returning downstream assets all at once rather than piecemeal, as they’ve been doing. On the other hand, the split "liberates downstream to pursue its own growth opportunities," according to incoming Philips 66 CEO Greg Garland. "As an integrated oil company we were pushing a lot of our capital to the Exploration and Production (E&P) space, which was the right thing to do as an integrated oil company."[32]
Simone Sebastian and Emily Pickrell writes in the Houston Chronicle that Mulva abandoned the super-major model that its retiring leader helped engineer a decade ago leaving behind "a more modest oil exploration and production company, streamlined by the aggressive asset sell-off that has defined his final years at the helm." Mulva is the last of a group of oil executives who orchestrated the model of building companies that delivered fuel from the ground to gas tanks through their own international networks of exploration, refining and distribution assets. "He appreciated the changing paradigm in the industry a decade ago when all the oil companies were combining," said Doug Terreson, head of energy research for ISI. "The oil industry is shifting toward a new competitive paradigm now and separation makes a great deal of logic."[33]
Rod Walker writes in the Tulsa World on April 28, 2012 that "the separation of ConocoPhillips and Phillips 66 is the final achievement of CEO Jim Mulva's eight-year reign atop the integrated company" although questions abound regarding the rationale behind the split one decade after the merger that created ConocoPhillips. "Why was it better to get bigger 10 years ago and not now?" asks Bruce DeShazo, assistant vice president and investment adviser at American Heritage Bank of Sapulpa. "I would think the reason they'd do something like this is to divest those losing assets. They're just having a hard time making money in refining." Outgoing ConocoPhillips CEO Jim Mulva wants to reduce the company's exposure to refining by spinning off Phillips 66. "We said sell non-core assets, position for growth. Essentially, 90 percent of our capital spending is directed towards exploration and production, and reduce our exposure to refining."[34]
According to Mulva in his presentation to financial analysts on July 14, 2011, the question is why would you spin out the downstream versus to stay integrated. "We believe more value is created in the formation of two very clear, standalone companies versus accomplishing our objectives of rationalizing our downstream within the integrated oil structure. There is generally greater external transparency of the business performance when the marketplace looks at the pure plays versus being accomplished in the integrateds. And we also believe there is more focus and attention and greater probability of success by the management team by having pure-play separate upstream and downstream companies. Our investors, we believe, have the better ability to adjust to overweight or underweight their views of investing in these segments of integration, upstream and downstream. And as I just said, there is greater management focus to customize strategies, both upstream and downstream. And we also believe with this, it really allows us to attract, retain and compensate the talent we need to create the highest probability of success upstream and downstream."[16][17]
"I think that world and that marketplace has pretty well changed. So if we look out the medium- and the long-term, we face this challenge, whether we are viewed as independent or viewed as an integrated company, the issue of competitive growth is the same, whether it is a company bigger than ourselves or it is an independent smaller than ourselves. So it doesn't change with the accomplishment of doing this transaction and spinning out the downstream. We are faced with the same challenge. Some also could argue that the larger you are, the more difficult it is, given the access issues, and in many places in the world, an emphasis of trying to move IOCs or independents more towards service contracts than it is taking equity interest. So all we are saying is whether we are classified as independent or classified as an integrated, or however we are classified and what we are structured, we still have the issue of how do we take our current reserve position and our production, how do we grow it and do it with competitive finding and development cost. So we have got the same challenge. Now, if we do that well, whether we are integrated or we are viewed as independent pure plays, if we do that well, it will be recognized in the marketplace. And that is really where we are coming from. We are not doing something cleverly just to get a higher PE multiple, but we do think the pure plays are better understood in the marketplace, and it is going to put a lot more focus on our management and our leadership to accomplish the objective, which is to convert the resources that we have. We like to always get more resource, but convert those resources to reserves, and do that really well with competitive finding and development cost, we will grow our production and we will do it in a value-creating way."[16][17]
"The other thing is we look at our Company in the marketplace, we have a number of investors that would say you are making the investment decision for us. You are putting us in both the upstream and downstream business, where we would like to make that investment decision ourselves. So by being separated, you can take your choice. You want to invest in the downstream, you want to invest in the upstream. So if you look at the integrated company, you can say, well, I think the downstream part of the company is holding back on the value creation and recognition of your E&P business. And then on the other hand, those people who are interested in the downstream would say, you are not getting recognition for the quality or the contribution of the downstream. And then there is another issue that we have seen, unfortunately. But from an enterprise risk management point of view, having two separate companies is -- we think is something that makes a lot of sense. And so it is for these different reasons and putting more focus both upstream and downstream at attention, and clear peer plays, not so much that the market can look and make the decision where they want to invest, but the leadership of the company knows clearly what business they are in and they dedicate their attention to doing it in a value-creating way."[16][17]
See also
- ConocoPhillips. "Creating Two Leading Energy Companies" July 14, 2011.[17]
- ConocoPhillips Analyst Meeting - Color Slides "ConocoPhillips Conference Call to Discuss its Pursuing Plan to Separate Into Two Stand-Alone, Publicly Traded Companies" July 14, 2011.[16]
Implementation of the ConocoPhillips Split
On May 1, 2012 Phillips 66 issued a press release announcing that Phillips 66 had emerged as an independent downstream energy company with industry-leading businesses in refining and marketing, midstream, and chemicals. Created through a spin-off of these assets from ConocoPhillips, Phillips 66 begins regular trading on the New York Stock Exchange this morning under the ticker symbol PSX. "Our strategic approach combines one of the world's most competitive refining and marketing operations with rapidly growing midstream and chemicals businesses," said CEO Greg Garland. "Phillips 66 will be clearly differentiated from pure-play refining companies with specific plans for enhancing returns and growing shareholder distributions. We have an exciting future ahead of us."[35]
On November 11, 2011 the Tulsa World reported that Phillips 66 would be the name for the new independent oil and gasoline refining and marketing firm, created as ConocoPhillips splits into two companies. ConocoPhillips will keep the current name of the company and will concentrate on the exploration and production side while Phillips 66 will include refining and marketing portions of the company. Each company will be run independently and will have different tocker names in the stock market. The refinery in Ponca City employs about 700 people while Bartlesville will be the global center for the Phillips 66 technology organization as well as the transaction services organizations for both companies.[36] ConocoPhillips CEO Jim Mulva will resign once the split is complete and Greg Garland will be the new CEO of Phillips 66.[36] The decision to name the new entity for Phillips 66 is because of name recognition and branding. "Phillips 66 has strong brand recognition and value, and it provides a link between our rich history and our exciting future," Garland said Thursday in a news release. "Our name reflects an independent spirit and drive."[36]
On April 4, 2012 ConocoPhillips' board of directors gave its final approval for the spin-off of its downstream businesses into Phillips 66.[37] ConocoPhillips executive vice president and CFO Jeffrey Sheets announced on April 23, 2012 that ConocoPhillips is putting its final touches on its spinoff of Phillips 66 this week, and the transaction will take place as scheduled on May 1, 2012.[38]
Decision to Name the Downstream Company Phillips 66
ConocoPhillips announced on November 11, 2011 that the new independent downstream company created through its previously announced strategic repositioning will be named Phillips 66. With a history that goes all the way back to petroleum industry "birthplace," in Bartlesville, Oklahoma in 1917, the company will be a leading independent company with refining, marketing, midstream and chemicals businesses operating across the globe. "Phillips 66 has strong brand recognition and value and it provides a link between our rich history and our exciting future," said Greg Garland, designated chairman and chief executive officer of Phillips 66. "Our name reflects an independent spirit and drive--two attributes of our future company."[39] According to the ConocoPhillips web site "the name Phillips 66 was chosen [for the new downstream company] because it has strong brand recognition and value, which allows us to link our rich history and our exciting future. The name represents the independent spirit and drive that will be part of the culture of Phillips 66."[40] The new company's name capitalizes on the public awareness and gives tribute to history, Garland added.[41]
The company launched a new Phillips 66 website: www.phillips66.com, that provides some history of the brand:
Frank and L.E. Phillips were two of the original experts in gas. They started prospecting for oil in 1903 and founded Phillips Petroleum Company in 1917. Since then, the company has grown considerably and has expanded its product offerings through its commitment to innovation and meeting customer needs. That’s fancy talk for "we keep making it better." Phillips 66® also has a history with US Highway 66. In 1927, on the "Mother Road" during a test drive of a newly developed high-octane gasoline, the vehicle reached a cruising speed of 66 mph. The new fuel was named Phillips 66. Even the logo was inspired by the road signs that dot the length of the historic highway. And the rest is history. And gas. Very High quality gas.[42]
The Houston Chronicle reported on November 10, 2011 that according to ConocoPhillips spokesman John Roper, while Phillips 66 products will retain the traditional logo, executives haven't decided whether to make it the corporate logo as well.[41]
The Bartlesville Examiner-Enterprise editorialized on April 29, 2012 that "the downstream energy company — named Phillips 66 in a tip of the cap to its product lineage begun right here in Bartlesville — will be a leading independent refining, marketing, midstream and chemicals business."[43]
Governance of Phillips 66
Jim Mulva, Chairman and CEO of ConocoPhillips
Although Jim Mulva will not be a corporate officer of Phillips 66, Mulva was the chairman and chief executive officer of ConocoPhillips and conceived and executed the idea of splitting up ConocoPhillips which resulted in the creation of Phillips 66. Mulva plans to retire on May 1, 2012 when the split has been accomplished. Mulva served as president and chief executive officer of ConocoPhillips from 2002 to 2004. Prior to that, he served as chairman and chief executive officer of Phillips Petroleum Company from 1999 to 2002. Mulva served as Phillips’ president and chief operating officer beginning in May 1994 and executive vice president since January 1994. Mulva had been senior vice president in 1993 and chief financial officer since 1990, at which time he joined the company's management committee. Mulva began his career with Phillips in 1973.
Mulva graduated from the University of Texas in 1968 with a bachelor's degree and a master's degree in business administration finance in 1969.[46]
The Houston Chronicle reported on April 23, 2012 that Jim Mulva will retire May 1 when ConocoPhillips' refining, pipelines and chemicals units spin off to form an independent, publicly traded company called Phillips 66.[44]
Rod Walton writes in the Tulsa World on April 28, 2012 that ConocoPhillips decided that bigger was better when Phillips Petroleum Co. and Conoco Inc. merged in 2002, but now has turned 180 degrees around in 10 short years now believing that smaller is what investors want. ConocoPhillips, the nation’s third-largest integrated energy firm, will now become known as a “pure play” independent when the refining and chemical side is spun off into a new company called Phillips 66. "Mulva helped oversee the 2002 merger as head of Phillips Petroleum and now walks offstage into retirement as the one company becomes two," writes Walton.[47] "Outgoing Chairman and CEO Jim Mulva, who has expertly led the company for a decade — and several years prior to that as Chairman and CEO of Bartlesville-based Phillips Petroleum Co. — steps into retirement having proven to be a true friend to the City of Bartlesville," editorialized the Bartlesville Examiner-Enterprise.[43]
Greg Garland, Chairman, President and CEO of Phillips 66
Greg Garland has been designated the Chairman and CEO of Phillips 66, the new Downstream company created with the split-up of ConcoPhillips. Garland is expected to take charge on May 1, 2012. Greg Garland was senior vice president, Exploration and Production, Americas for ConocoPhillips at the time of the split.
Garland received a Bachelor of Science degree in chemical engineering from Texas A&M University in 1980. Garland has more than 30 years of industry experience in technical and executive leadership positions with ConocoPhillips, its predecessor Phillips Petroleum Company, and Chevron Phillips Chemical Company.
Garland was previously president and chief executive officer of Chevron Phillips, a joint venture between ConocoPhillips and Chevron. Before his election to that position, Garland served Chevron Phillips as senior vice president, Planning & Specialty Chemicals. His prior experience includes serving as general manager of Qatar/Middle East for Phillips, a position he assumed in 1997. From 1995 to 1997, he served as general manager of natural gas liquids after serving as manager of planning and development in planning and technology. From 1992 to 1994, he was manager of the K-Resin® business unit. Garland began his career with Phillips in 1980 as a project engineer for the Plastics Technical Center. He later worked as a sales engineer for Phillips' plastics resins, business service manager for advanced materials, business development director, and olefins manager for chemicals.[48]
Garland, who formerly headed Chevron Phillips Chemical, was selected to head the new company over Willy Chiang, senior vice president of ConocoPhillips' refining division.[33]
John Lowe, Member of the Phillips 66 Board of Directors
Apart from Greg Garland, J.E. (John) Lowe is the only present or former employee of ConocoPhillips serving as a member of the Board of Directors of Phillips 66. Lower was executive vice president, planning, strategy and corporate affairs, of ConocoPhillips with responsibility for emerging businesses, as well as government affairs and communications. Lowe previously served as senior vice president, corporate strategy and development and was responsible for the forward strategy, development opportunities and public relations functions of Phillips Petroleum Company. Lowe was named to this position in 2001 after serving as senior vice president of planning and strategic transactions in 2000 and vice president of planning and strategic transactions in 1999. Lowe currently serves on the board of directors for Chevron Phillips Chemical Company, Duke Energy Field Services and the Houston Museum of Natural Science.
Lowe was born in 1959 in Oskaloosa, Iowa. Lowe received a bachelor of science degree in finance and accounting from Pittsburg State University in Pittsburg, Kansas, in 1981. Lowe is a certified public accountant.[49]
Board of Directors
On April 16, 2012 Phillips 66 announced the names of the seven members of its future board of directors. Greg Garland will serve as Phillips 66' chairman, president and CEO. He most recently served as senior vice president, Exploration and Production -- Americas for ConocoPhillips. The other members of the board will be:
- Greg Garland, Phillips 66 chairman, president and CEO
- John Lowe, who has served as assistant to the CEO of ConocoPhillips. Lower currently serves as assistant to the CEO of ConocoPhillips, a position he has held since 2008. He previously held a series of executive positions with ConocoPhillips, including executive vice president, Exploration & Production, from 2007 to 2008 and executive vice president, Commercial, from 2006 to 2007. He currently serves on the board of Agrium Inc.
- J. Brian Ferguson, retired chairman and CEO of Eastman Chemical Co. Ferguson served as chairman of Eastman Chemical Company (Eastman) in 2010 until his retirement and as CEO of Eastman in 2009. He became the chairman and CEO of Eastman in 2002. He currently serves on the boards of Owens Corning and NextEra Energy Inc.
- William Loomis Jr., an independent advisor who formerly served as CEO of Lazard LLC . Loomis has been an independent financial advisor since 2009. He was a general partner and managing director of Lazard Freres & Co. from 1984 to 2002, the CEO of Lazard LLC from 2000 to 2001 and a limited managing director of Lazard LLC from 2002 to 2004. He currently serves on the boards of Pacific Capital Bancorp and Limited Brands Inc., and is also a senior advisor to Lazard LLC and China International Capital Corporation.
- Harold McGraw III, current chairman, president and CEO of The McGraw Hill Companies. McGraw currently serves as chairman, president and CEO of The McGraw-Hill Companies. Prior to his service as chairman, he served as president and CEO from 1998 to 2000 and president and chief operating officer from 1993 to 1998. He currently serves on the boards of The McGraw-Hill Companies, ConocoPhillips and United Technologies Corporation.
- Glen Tilton, chairman of the Midwest and was formerly chairman and CEO of United Airlines. Tilton currently serves as chairman of the Midwest of JPMorgan Chase & Co. He was chairman and CEO of United Airlines Inc. from 2002 to 2010, having previously spent more than 30 years in increasingly senior roles with Texaco Inc. including chairman and CEO in 2001. He currently serves on the boards of United Continental Holdings Inc. (as non-executive chairman), Abbot Laboratories and Corning Inc.
- Victoria Tschinkel, chairwoman of 1000 Friends of Florida. Tschinkel served as state director of the Florida Nature Conservancy from 2003 to 2006, was senior environmental consultant to Landers & Parsons, a Tallahassee, Florida law firm, from 1987 to 2002, and was the secretary of the Florida Department of Environmental Regulation from 1981 to 1987. She currently serves on the board of ConocoPhillips.
"We have assembled a strong board of directors, consisting of individuals with appropriate skills and experiences to meet their governance responsibilities and contribute effectively to our company," said Garland. "Our board reflects a range of talents, diversity and expertise, particularly in the areas of accounting and finance, domestic and international markets, government and regulatory affairs, management and leadership and petroleum-related industries, sufficient to provide sound and prudent guidance with respect to our operations and interests."[50][51]
Phillips 66 and the Stock Market
On April 4, 2012 ConocoPhillips' board of directors announced that two new companies will be separated through the distribution of shares of Phillips 66 to holders of ConocoPhillips common stock. This distribution is expected to occur after market close on April 30, 2012. ConocoPhillips shareholders will receive one share of Phillips 66 common stock for every two shares of ConocoPhillips common stock held at the close of business on the record date of April 16, 2012.[37]
It was announced on April 23, 2010 that Phillips 66 will join the the S&P 500.[52]
On May 2, 2012, executives and employees from Phillips 66 celebrated the company's first week of regular trading on the New York Stock Exchange by ringing the opening bell. Chairman and Chief Executive Officer Greg C. Garland led the delegation, which included employees from its Houston Headquarters and Bayway Refinery in Linden, N.J.[53]
New Headquarters
Houston Business Journals reported on March 20, 2012 that according to an email sent to employees, the new headquarters of refining and marketing spin-off company Phillips 66 will be near Interstate 10 and Beltway 8, within 10 miles of ConocoPhillips' current headquarters at 600 N. Dairy Ashford Road. The decision to locate i Houston was made because the company’s oil and gas infrastructure is already present. During the two- to three-year construction period on the new facility, Phillips 66 employees will be located in temporary locations in the company’s current space.[54]
Strategic Vision for Phillips 66
On April 9, 2012, Greg Garland, the designated CEO of Phillips 66, presented an overview of the new company and his plans for Phillips 66. There are three leading operating segments in the new company: Chemicals, Midstream, and Refining and Marketing.[55][56][57]
Ponca City falls into the Refining and Marketing business segment of Phillips 66.
See also:
- Slide Presentation for Phillips 66 Investor Update
- Transcript of Phillips 66 Analyst Update
- Seeking Alpha. "ConocoPhillips' CEO Hosts Phillips 66 Analyst Update Conference Call" April 9, 2012
Return on Capital Employed (ROCE)
ROCE (Return on Capital Employed) is a ratio used in finance, valuation, and accounting that compares earnings with capital invested in the company is used to prove the value the business gains from its assets and liabilities.[58] The three operating segments of Phillips 66 have very different ROCE's. In 2011 the ROCE of the Refining and Marketing segment was 12%, the ROCE of the Midstream segment was 30%, and the ROCE of the Chemical segment was 28%. Because the ROCE of the Chemical segments and the Midstream segments is so much higher than the ROCE in the R&M segment, Garland plans to plans to aggressively grow the Chemicals and Midstream segments of Phillips 66 and de-emphasize the Refining and Marketing segments of the company.
Benefits of Being an Independent Company
Garland talked about the benefits of Phillips 66 being an independent company. "As I think about the spin and really the strategy and the rationale behind the spin, it creates opportunity for Phillips 66 to create value that we just couldn't pursue as part of the integrated ConocoPhillips. Our existing R&M business, our Chemicals and Midstream business, all provide good, solid cash flow and we can use this cash flow to fund strategic growth. We can use it to improve returns, and also for distributions to shareholders. I think another benefit of the spin is you will see greater granularity regarding asset performance and the financial results in all three segments."[55][56][57]
Plan to Aggressively Grow Chemicals and Midstream segments of Phillips 66
Garland plans to aggressively grow the Chemicals and Midstream segments of Phillips 66 and de-emphasize the Refining and Marketing segments of the company. "Over the past three years we've reduced refining capacity about 450,000 barrels a day. In our Chemicals segment we've been growing primarily through investments in the Middle East. In our Midstream segment, growth has come from expansions around the shale liquids and gas producing areas."[55][56][57] "The refining business is currently a difficult business and one where the outlook doesn't change a lot going forward," said Mark Gilman, an independent oil and gas analyst. "Phillips 66's asset quality in the refining space is, at best, kind of average."[33]
The best performing divisions for Phillips 66 are expected to be its midstream joint venture and a petrochemicals company.[33]
DCP Midstream
DCP Midstream, is a 50-50 joint venture with Spectra that helped counteract poor refining performance last quarter for ConocoPhillips. "The fundamentals of the business could not look better," said Spectra CEO Greg Ebel. "DCP operates in liquids-rich areas. In those areas, we are seeing dramatic volume growth, which is helping overcome low natural gas prices for our consumers."[33]
Phillips 66 primarily conducts its Midstream operations through DCP Midstream, LLC, a 50 percent joint venture with Spectra Energy and one of the largest natural gas gatherers and processors in the United States, as well as the largest producer of NGL in North America. Now in its 13th year of operations, DCP Midstream is a full-service provider of gathering, processing and NGL logistics services with strategically located assets in liquids-rich developments. The gas collected by DCP Midstream is processed at 61 owned or operated plants and treaters. Growth in liquids-rich developments in the United States is driving infrastructure demand and expansion opportunities for our Midstream segment. DCP Midstream has $4 billion in major projects currently in execution, including two major pipeline projects. The Southern Hills Pipeline will run more than 900 miles to Mont Belvieu, Texas, with a target capacity of more than 150,000 barrels per day of NGL. The project is expected to start up in mid-2013. The Sand Hills Pipeline is a 720-mile NGL line that will run through the Permian and Eagle Ford basins to market centers along the U.S. Gulf Coast. Initial capacity will be 200,000 barrels per day, and service may be expanded to 350,000 barrels per day. The Sand Hills Pipeline will be phased into service, with the first phase completed by the third quarter of 2012 and the second phase expected as soon as the third quarter of 2013.[35]
Chevron Phillips Chemical
Chevron Phillips Chemical, a joint venture with Chevron that will be part of Phillips 66, is benefiting from low prices for the natural gas it uses as feedstock to make products such as ethylene and polyethylene plastic. The company has made it clear that Chevron Phillips Chemical is a top priority. It has announced plans to invest in a new $5 billion ethylene cracker at Cedar Bayou.[33]
Phillips 66's Chemicals business is conducted through its 50 percent interest in Chevron Phillips Chemical Company LLC (CPChem), a joint venture with Chevron U.S.A. Inc., a wholly-owned subsidiary of Chevron Corporation. Now in its 12th year of operations, CPChem is one of the world's top producers of olefins and polyolefins with more than 30 billion pounds of net annual chemicals processing capacity across its product lines. The rapid development of natural gas and NGL from shale formations in the United States is driving major growth opportunities for CPChem. At its Cedar Bayou Chemical Complex in Baytown, Texas, CPChem is building the world's largest on-purpose 1-hexene plant capable of producing up to 250,000 metric tons (551,000,000 lbs.) per year. Construction of the 1-hexene plant is expected to begin in the first half of 2012, and the project is anticipated to start up during 2014. CPChem also aims to construct a world-scale ethane cracker at its Cedar Bayou facility in Baytown, Texas, and two polyethylene facilities near its Sweeny facility in Old Ocean, Texas, with anticipated startup in 2017, pending final investment decisions. "Phillips 66 starts out with a clear advantage over many other downstream companies," said Garland. "We have a robust portfolio of businesses that already rank among the best-performing players in their industry segments, a strong financial position, an extraordinary global workforce, and a continued commitment to safety and operating excellence. We have an unparalleled foundation for success."[35]
Plan to Focus on Operational Excellence
"We'll always focus on operational excellence. We'll focus on building a great organization to execute our plans, but we are committed to delivering differential shareholder value. We have a core belief that by improving returns in our businesses, and we'll improve returns by managing the portfolio, capturing margin, improvement opportunities, pushing yields, and shifting capital into higher use and higher return opportunities like Chemicals and Midstreams. We believe we have opportunity to grow in those areas and then we also think, as part of our core program, that shareholder distributions are important.We will pay a competitive dividend.We will grow that dividend over time. We'll have excess cash that we can direct toward share repurchases."[55][56][57]
What Independent Financial Analysts Think of Phillips 66 Plans
April 2012
Forbes Magazine is Skeptical that Phillips 66 will trade at a higher multiple than ConocoPhillips
Christopher Helman writes in Forbes magazine that the chasm between how investors value oil finders versus oil refiners is ultimately what the split of ConocoPhillips is all about. Helman notes that the return on capital employed on the Phillips 66 side has improved dramatically, from 1% in 2009 to 5% in 2010 to 13% in 2011. But they are continually outstripped by the upstream, which managed 8%, 12% and 16% in those years. Greg Garland hopes that the downstream will trade at a higher multiple than 8 times earnings which is what ConocoPhillips traded at before the split. “You never really heard us talk about chemicals," says Garland. "You never heard us talk about midstream, and both of those businesses trade at higher multiples than the refining business.”
"The trouble is, if I want to own chemicals I could buy Dow or Celanese. If I want to own pipelines I could go for Kinder Morgan or Enbridge," writes Helman. "As for refineries — I really don’t want to own them at all. I hope Garland has some cool tricks up his sleeve, but otherwise investors have to ask themselves this: ConocoPhillips didn’t want to own this stuff, why should I?"[32]
The Motley Fool sees Phillips 66 becoming a Master Limited Partnership
On April 5, 2012 Isac Simon wrote on "The Motley Fool" that management of Phillips 66 plans to run the integrated downstream company as a tax-free distribution. "This means, in all likelihood, that Phillips 66 will become a master limited partnership -- an MLP, in short," writes Simon. "Since MLPs are required to distribute a major percentage of their profits to shareholders as dividends, this kind of a corporate structure might not attract strong investor interest for the downstream company -- at least till the refining industry recovers."
"But that doesn't necessarily mean failure. There's still a lot to look forward to. Post spin-off, Phillips 66 will become the country's second largest independent refiner, with a working interest in 12 refineries. Out of these, six are located in the Mid-Continental region and the Gulf coast. Refineries in these regions have the advantage of being located close to the delivery point of WTI crude oil in Cushing, Okla. These refineries could obtain the cheaper WTI blend as compared with the more expensive Brent crude, the international benchmark."[59]
Wall Street Daily says Phillips 66 is a Better Investment than ConocoPhillips
On April 25, 2012 Jason Simpkins reported in the Wall Street Daily that if you’re wondering which will be the better investment when ConocoPhillips splits into two companies, the answer is Phillips 66. "As the proprietor of ConocoPhillips’ pipeline and chemicals business, Phillips 66 controls two of the current company’s most dynamic assets. In the first quarter, Conoco’s midstream business, which includes pipelines, saw a 27.4% jump in profit. Its chemical business raised profits by 13%." Simpkins sees the R&M segment as a drag on the company. "Phillips 66 is looking to shirk its burdensome refining segment in favor of more profitable businesses. The company has plans to shut down its Trainer refinery in Pennsylvania, as well as its Alliance plant in Louisiana. Together, those facilities account for about one-sixth of the company’s refinery capacity." Simplins sees Phillips 66 expanding in Chemicals and Midstream which are more profitable businesses. "Conoco’s earnings from chemicals surged from $498 million in 2010 to $745 million last year. Midstream profits rose from $306 million to $458 million." Finally Simpkins is very impressed with Phillips 66' CEO Greg Garland who formerly headed Chevron Phillips Chemicals Co. – Conoco’s joint venture with Chevron Corp whose stewardship there resulted in a 42% jump in profit last year.[60]
Refineries and Marketing Business Segment
Garland said during his analyst call on April 9, 2012 that the refining and marketing segment has one of the broadest geographic bases of our peers. Phillips 66 has 15 refineries and 2.2 million barrels a day of capacity and is the sixth largest non-governmental controlled refiner in the world, the second largest US refiner. Phillips 66 is the only independent downstream to have significant ownership and interest in gas gathering and processing in the global petrochemicals business.[55][56][57]
The focus of our analysis is the Refining and Marketing business strategy. The other two business segments will be treated separately and in less detail.
Location of Refining Assets
Phillips 66 has 15 refineries globally and 2.2 million barrels a day of capacity. "When we think about our refining business we like to think about it in four segments. One is the Mid-Continent, about 21% of our capacity is there. Margins have been very strong in this area, as you know. Our largest region is the Gulf Coast, about 33% of our capacity is there.We have large economy of scale here. We have very complex refineries on the Gulf Coast. The Western US and Pacific region is about 20%, includes our interests in the Melaka refinery.The West Coast has typically had high margins historically, but the last couple years has been challenged in part due to the economic slowdown in California."[55][56][57]
The Ponca City Refinery
The Ponca City Refinery, located in Ponca City, Oklahoma, has a crude oil processing capacity of 187 MBD making it by far the largest refinery in Oklahoma.[61] The refinery processes a mixture of light, medium and heavy crude oil. Most of the crude oil processed is received by pipeline from the Gulf of Mexico, Oklahoma, Texas and Canada. Additional foreign crude is purchased into the Gulf Coast and delivered by pipeline. The Ponca City Refinery is a high-conversion facility that produces a full range of products, including gasoline, diesel fuel, jet fuel, LPG and anode-grade petroleum coke. Its facilities include fluid catalytic cracking, delayed coking and hydrodesulfurization units. Finished petroleum products are shipped by truck, railcar, and company-owned and common-carrier pipelines to markets throughout the Mid-Continent Region.[62]
High Profitability of Mid-Continent Refineries
According to Christopher Helman writing in Forbes magazine, Phillips 66′s most profitable refineries of the past couple years are in what’s called the Mid-Continent — from Texas north to Montana including the Sweeney refinery, Ponca City, Wood River and Billings. The reason for their high profitability has been the glut of crude oil pouring into the region from newly tapped shale oil plays like North Dakota’s Bakken. "Because there was a lot of new oil and not enough pipeline capacity to get it down to the Gulf Coast mega-refineries, the crude got bottled up in the storage tanks at Cushing, Oklahoma.", writes Helman. "The bottleneck that kept oil from getting out of Cushing also kept its price at a record-wide discount relative to its rival European benchmark Brent crude. At one point last year you could buy a barrel of WTI for $27 less than a barrel of Brent. Historically WTI has been slightly more expensive." In an April conference call with analysts, Garland said the company had been generating $90 million in annual net income for every dollar of WTI-Brent price differential that it could capture for its refineries. However, this opportunity is not going to last long term because there will soon be plenty of new options for getting crude out of Cushing and Garland agrees that the price differential will collapse. “Over three to five years those wide differentials that we’re seeing in the Midcon will collapse to the transportation differential,” he told me. “So more like $3 to $5 a barrel. It’s not going to be $20 forever.”[32]
Phillips 66 Plans to Run More Shale Oil
Kristen Hays wrote on Reuters on May 1, 2012 that Greg Garland says the Phillips 66 aims to process more shale oil "everywhere we can get it." Garland added that several refineries are already well positioned to receive shale oil, such as its 247,000 barrels-per-day (bpd) refinery in Sweeny, Texas, in proximity to the state's prolific Eagle Ford shale play, or Midwest plants. The company last fall also ran unit trains from the Bakken shale oil play in North Dakota to its 238,000 bpd Bayway refinery in Linden, New Jersey, and has taken trains to West Coast refineries. "You'll see us stepping out and doing some more things around infrastructure," he said. "Like everyone else, we're doing everything we can to get more barrels in front of those facilities."[63]
Operating Excellence and Safety
Garland says that Phillips 66 has a strong history of operating excellence which includes personal safety, process safety, environmental excellence, and reliability which he plans to continue. "We expect employees can work one day, one week, one month, even an entire career, without getting hurt. Over 30 years, I've observed that our safest facilities tend to have the best cost structures. They tend to be the most reliable facilities that we have. There's solid business reasons for focusing on operating excellence. It's clearly a foundation for sustainable value. We've got more work to do here. Zero's the target.That's where we're heading."[55][56][57]
Growth Strategy in Refineries and Marketing
"As we look at our refining business, we pulled capital down over the past couple years. Our sustaining level of capital in the R&M segment is about $1 billion a year. We will focus some incremental spend in R&M on margin improvement projects. We think that there's opportunities to capture more feed stock advantaged crudes. We can drive our clean product yields, increase our export capability. 1% improvement in clean product yield gives us about $100 million to $150 million of net income improvement. If we can capture $1 a barrel of WTI/Brent differential, it's worth about $90 million of net income. There is powerful economic incentives to capture these margin improvements."[55][56][57]
Garland told the Houston Chronicle on May 1, 2012 that investments in refining will enhance its export abilities and connections to lower-cost crude. "But you won't see us investing to increase refining capacity," Garland says. Garland says that Phillips 66 will execute a number of strategies to revitalize the refining business. Phillips 66 will target lower-cost oil and focus more of its refining capacity on producing diesel and other high-yield fuels. The company also will ramp up exports to foreign markets that offer higher prices for their fuel.[64]
Shifting Capital Employed
In 2011 about 84% of Phillips 66 capital was allocated to Refinery and Marketing with 11% allocated to Chemicals and 5% to Midstream. Phillips 66 plans a major change in this allocation. "Long-term we have a vision that about 50% of our capital employed will be directed towards the R&M segment. And the other 50% will be directed towards Midstream and Chemicals."[55][56][57]
Refining and Marketing Earnings
2012 Q1 Earnings
ConocoPhillips announced on April 23, 2012 that for Q1 2012, R&M’s worldwide crude oil capacity utilization rate was 91 percent, reflecting minimal unplanned downtime. The U.S. refining capacity utilization rate was 89 percent and the international rate was 97 percent. In addition, the worldwide clean product yield remained at 84 percent. R&M earnings were $452 million, compared with $482 million a year ago. The slight decrease was primarily due to lower refining margins, partially offset by higher marketing margins. Refining margins decreased as the impact of less favorable crude differentials more than offset improved market crack spreads. Pre-tax turnaround expenses for the quarter were $176 million, in line with expectations.[65]
“There’s enough refineries in the world today"
In recent years ConocoPhillips has sold a European refinery and backed out of a big project with Saudi Aramco to build a brand-new refinery in Saudi Arabia. Phillips 66 is looking to sell its Alliance refinery in Louisiana and its Trainer plant in Pennsylvania “We’ve been selling and shutting down unprofitable assets,” says Garland. “There’s enough refineries in the world today." “No one knows these assets better than the guys at ConocoPhillips; if they think it’s a good idea to jettison this baggage, shouldn’t you too?” says Ed Hirs, a professor of energy economics at the University of Houston. “No one is going to want to buy into Phillips 66. They have no growth, no upside and huge environmental liabilities.[32] Jim Mulva reiterated in his conference call to financial analysts on July 14, 2011 in answering a question by Ed Westlake of Credit Suisse that "if we have an alternative to sell one of the less sophisticated refineries in a way, we are not going to delay until this is done accomplishing and doing that."[16][17]
Phillips 66 Sells Trainer Refinery
Phillips 66 issued a press release on May 1, 2012 announcing that Phillips 66 and Monroe Energy LLC have signed a purchase and sales agreement for Monroe Energy LLC, a subsidiary of Delta Air Lines, to purchase the Trainer Refinery and associated terminal and pipeline assets for $180 million. The purchase price does not include the value of existing inventories. The transaction is expected to close in the first half of 2012. Phillips 66 also has entered into multi-year agreements with Monroe to supply jet fuel to Monroe in other regions of the country while Phillips 66 will purchase gasoline and other refined products from Monroe at the Trainer Refinery and local terminals.[66]
Critics of Delta's purchase of the refinery have questioned the wisdom of Delta trying to run a refinery in the Northeast. Ed Hirs, a professor of energy economics at the University of Houston, said hedging fuel costs through options can accomplish very much the same agenda without being exposed to the risks of owning a refinery.[67]
Reuters reported on April 9, 2012 that Phillips 66 continue to shore up its refining portfolio and has two refineries up for sale - Trainer and Alliance in Louisiana. Sources familiar with the sales process said Delta Airlines is considering a bid for the Trainer refinery, idled at the end of September 2011, and is in "very critical" negotiations with ConocoPhillips. Reuters also reports that there may be other actions affecting its portfolio.[68]
Andrew Maykuth wrote in the Philadelphia Inquirer that a bid by Delta Airlines to buy the idled Phillips 66 refinery in Trainer to satisfy its enormous thirst for jet fuel appears to be gaining momentum. "Sources close to negotiations believe that Delta Air Lines has emerged as the clear favorite for the idle plant," says Tom Kloza, publisher of Oil Price Information Service. "The action certainly implies that the Trainer refinery will be restarted in the second half of 2012, and perhaps as early as July or August." Delta's interest in buying a business that an experienced oil company wants to jettison has raised eyebrows among some analysts, who believe that the airline has other means available to protect itself from fuel-price fluctuations without investing in manufacturing. "At one level it makes sense to better manage supply," said James Balaschak, a principal with Deloitte Consulting L.L.P. in Philadelphia. "On the other hand it is outside their core business. There are alternative strategies such a hedging which can be as effective."[69]
Phillips 66 and is Trying to Sell Alliance Refinery
Garland told Reuters on May 1, 2012 that Phillips 66 aims to double refined product exports to 200,000 bpd in the next two years, but its 247,000 bpd Alliance refinery in Belle Chasse, Louisiana -- which runs light-sweet crude -- is on the block. Increasing U.S. light-sweet inland shale oil output along with more infrastructure to move it to the refinery-heavy Gulf Coast means more advantaged crude prices could show up in the region in the coming years, increasing Alliance's value, Garland said. If the price isn't right for what he called "a good export platform for us," Phillips 66 will keep it, Garland said. "We wouldn't let the refinery go cheap."[70]
Phillips 66 Plans to Keep the Bayway Refinery
Garland told Reuters on May 1, 2012 that Phillips 66 plans to keep the Bayway plant and its foothold in the East Coast refining market. "It's a good machine. It should be the last refinery standing in PADD I," Garland said.[71]
On May 2, 2012, executives and employees from Phillips 66 celebrated the company's first week of regular trading on the New York Stock Exchange by ringing the opening bell at the New York Stock Exchange (NYSE) with Phillip 66 Chairman and Chief Executive Officer Greg C. Garland leading the delegation, which included employees from Phillips 66' Houston Headquarters and employees from Phillips 66 Bayway Refinery in Linden, NJ.[72]
Billings Refinery Anticipates No Major Changes
KTVQ reported on May 1, 2012 that there will be no major changes with the Billings Refinery in Billing, Montana. "We don't expect any significant changes to our local operations. We are excited about being part of a new, independent downstream energy company. Phillips 66 has a robust portfolio of businesses that already rank among the best-performing players in their industry segments, a strong financial position, an extraordinary global workforce, and a continued commitment to safety and operating excellence."[73]
The Chemical and MidStream Business Segments within Phillips 66
There are two other operating segments in the new company: Chemicals and Midstream. “You never really heard us talk about chemicals; you never heard us talk about midstream, and both of those businesses trade at higher multiples than the refining business," says Garland. Phillips 66 will own half of the ChevronPhillips Chemical Company, a JV with Chevron. “Midstream and chemicals is what differentiates us."[32]
Chemical Segment
Garland said during his analyst call on April 9, 2012 that the Chemicals segment is primarily conducted through our 50/50 JV with Chevron. CPChem is one of the largest producers of olefins and poly olefins and has spent the last 10 years building one of the best positions in the Middle East, and CPChem has significant assets in the US which are advantaged given the NGLs from the North American shale plays.[55][56][57]
"As we've said, our Chemicals operations are conducted through our CPChem joint venture with Chevron. Our Chemicals businesses delivered superior returns. We think it's an exceptional growth platform. CPChem produces petrochemicals in over 70,000 different commercial and industrial products, holds global market positions in several key products, such as olefins, poly olefins, aromatics and other specialties. It has a large global footprint and we're rapidly expanding outside of the US. We think part of CPChem's success and its foundation is based upon -- is proprietary technology.We believe this ensures lower cost for us, it enhances our competitiveness.These are markets, these are technologies that we understand thoroughly. As you know, advantage feed stocks is critical to profitability and sustained returns in this business. CPChem has a substantial footprint in the Middle East. CPChem also has a large asset base in the US. It's primarily based upon ethane. It's allowing CPChem to recover attractive margins today.We believe after the Middle East, the US-based ethane based ethylene margins are going to be significantly advantaged versus margins in Asia and Europe, which are primarily based on naphtha. CPChem's done a good job over the last few years in terms of their portfolio management. They've been very disciplined on their costs.They have been shifting investments into higher returning opportunities, and the have moved from really last in their peer group to number one in their peer group on economic return."[55][56][57]
Growth Strategy in Chemical Segment
"CPChem has a strong history of successfully executing growth projects. They've executed five mega projects in the Middle East over the past 10 years.They continue to work new opportunities in the Middle East region.They're currently building the world's largest 1-hexene plant at Cedar Bayou.They're actively pursuing a new Gulf Coast cracker.We think it will start up in 2017.This will be the first new cracker to start up on the Gulf Coast."[55][56][57]
Midstream
Garland said during his analyst call on April 9, 2012 that Phillips 66's Midstream businesses are primarily conducted through our 50/50 JV with Spectra and DCP is one of the largest gatherers and processors of natural gas and NGLs.[55][56][57]
"DCP is one of the largest gatherers and processors of natural gas and natural gas liquids. We do hold assets outside of DCP. We have interest in three fractionators with a net capacity of 112,000 barrels a day.We also have a 25% interest in the Rex pipeline. When you look at our Midstream operations and particularly the DCP, they overlay some of the best shale plays in North America and so just superbly positioned to capture significant growth opportunities. DCP, like CPChem, leads its peers in terms of economic return on assets."[55][56][57]
Growth Strategy in Midstream Segment
"We're investing significantly in both NGL pipelines and gathering, processing capability.When we look at the increased shale production, we believe there's about $70 billion to $80 billion worth of industry investment needed in infrastructure. Of that, about $21 billion has already been announced. And roughly $6 billion of the $21 billion is DCP's announced investments. When you look at DCP's assets, they overlay some of the best shale opportunities in the world today, places like the Eagle Ford, the Permian, the Anadarko, the Niobrara and others. DCP is just superbly positioned to capture and create value in this area and there remains considerable, additional opportunity in this space."[55][56][57]
Phillips 66 and Ponca City
How the Spinoff Affects Ponca City and Bartlesville
Rod Walton writes in the Tulsa World on April 28, 2012 that with the spinoff, Ponca City may not be affected as dramatically by the split as Bartlesville. Going back to the 2002 merger shows that Bartlesville and Ponca City were affected differently leaving the two cities in different situations today.[74]
Conoco employed nearly 1,900 people in Ponca City at the end of 2001, while Phillips had a workforce of 2,500 in Bartlesville. The ConocoPhillips numbers shrunk to only 750 refinery workers in Ponca City but swelled to 3,500 at the shared services center in Bartlesville. Ponca City is now purely a refining town, with Ponca City having lost all 750 non-refinery jobs during the three-year repositioning plan. "Today, we're a refinery town," said David Myers, executive director for the Ponca City Development Authority. "No doubt about it: the merger was not kind to Ponca City." "The dark humorists in that city used to joke that Ponca City got the first name in the merger but little else," writes Walton. "ConocoPhillips opted to shut down a carbon fibers plant early on and eliminated the rest of the 750 non-refinery jobs beginning in 2009."[74]
The Bartlesville Examiner-Enterprise editorialized on April 29, 2012 that Jim Mulva has "proven to be a true friend to the City of Bartlesville."[43] According to Rod Walton, Bartlesville was a big beneficiary of the ConocoPhillips merger and seems to have lived a charmed life economically over the past ten years. Although the home of Frank Phillips doesn't employ 9,000 company workers as it did in the early days, the 1,000 employees added since 2002 have kept downtown buildings such as Plaza and Adams full of mid-level computer, credit and other support personnel. But now Bartlesville operations are in flux and there is much uncertainty about the future. "All employees are being moved to one of the two companies, with co-workers who once sat side to side now literally shifted to separate buildings," writes Walton. ConocoPhillips will employ about 1,700 people in the downtown Plaza and Frank Phillips Tower Center buildings and in the Adams warehouse. Phillips 66's Bartlesville workforce will number 1,900 people, housed in the main Adams and Phillips buildings and the Research and Development Center on the west edge of the city.[74] The Bartlesville Examiner-Enterprise reported on April 29, 2012 that the "split or 'repositioning' as it has been called by company officials, has required many existing local employees to shift jobs and even physically move from one building to another within the extensive downtown Bartlesville office complex" adding that "while no one can predict the future with perfect clarity, Bartlesville appears no worse for the wear during this complex process."[43]
ConocoPhillips CEO Ryan Lance and Phillips 66 CEO Greg Garland reassured its employees in Oklahoma in an op-ed they wrote for the Bartlesville Examiner-Enterprise titled "ConocoPhillips, Phillips 66 have deep roots in Bartlesville" that "ConocoPhillips and Phillips 66 together employ nearly 4,500 people in Oklahoma, an increase in recent years. Going forward, we will both maintain Global Services Centers in Bartlesville providing essential finance, information technology and other vital support to our personnel around the world. Elsewhere, Phillips 66 will continue operating the Ponca City Refinery, by far Oklahoma’s largest, and will remain the leading gasoline marketer. ConocoPhillips will continue producing oil and natural gas from the Anadarko Basin and the Panhandle area." Lance and Garland added that "we continue encouraging both current and incoming employees to maintain our proud tradition of community service. Bartlesville is a special place to work, live and raise a family, and we want to help keep it that way. This is an exciting time for ConocoPhillips and Phillips 66. All of our Oklahoma communities are great homes to our people and businesses, and we both look forward to long and bright futures here."[75]
"The Phillips and Conoco merger has taught everyone, Poncans and Bartians alike, to simply expect the unexpected," writes Walton. "In other words, who knows what ConocoPhillips and Phillips 66 will look like 10 years down the road?" "We do have a strong Conoco retiree group that lives here," says Dave Myers. "There's still talk in the community, still those who'd like to go back to the old days. I think most people have moved on."[74][76]
Visit of Phillips 66 Leaders to Ponca City
On March 27, 2012, the Ponca City News reported that leaders from Phillips 66 visited Ponca City and were met by community leaders.
On the Phillips 66 side were Bob Herman, Future Lead of Health, Safety and Environment; Pete Stynes, Ponca City Refinery Manager; Larry Ziemba, future Lead of Refining, including Projects and Procurement, and President, Global Refining; Chantal Veevaete, future Human Resources; and Tim Taylor, future Commercial, Marketing, Transportation and Business Development.
On the Ponca City side were City Manager Craig Stephenson; Lee Evans, Chair of the Ponca City Area Chamber of Commerce; David Myers, Ponca City Development Authority; Rich Cantillon, Chamber of Commerce/Tourism Bureau; Carl Renfro, community leader; and Larry Murphy, Chair of the Ponca City Development Authority.[77]
Phillips 66 CEO Greg Garland, although originally scheduled to visit Ponca City with his management team, was not able to attend. Ponca City Mayor Homer Nicholson, retired from ConocoPhillips after 38 years service, was also unable to attend.
Ponca City Community Advisory Council (CAC)
The Ponca City Community Advisory Council (CAC) was established in 1991 between ConocoPhillips and the citizens of Ponca City. The CAC holds monthly meetings that start with updates on safety and environmental performance followed by information on refinery operations. Many meetings have an educational topic and often focus on environmental topics, such as air quality and groundwater remediation. Other topics of interest include sustainable development and the company’s other operations. The Ponca City CAC’s mission statement is to establish and maintain a dialogue between the community and ConocoPhillips in order to understand community issues and ConocoPhillips issues in an atmosphere of trust and mutual respect, using open, honest communication. With that in mind, members of the CAC conducted a survey in which they asked 10 community members about what issues, questions or suggestions they have for ConocoPhillips. The group used the results in planning the monthly meetings and other events in the community.[78]
Renaming of Refinery in Ponca City
On March 12, 2012 a web site was created asking the management of Phillips 66 to consider honoring EW Marland, the oil pioneer who started the refinery and developed the oil industry in North Central Oklahoma.
"The Ponca City News" recently announced that with the split of ConocoPhillips into two companies, the ConocoPhillips operation in Ponca City, Oklahoma will soon be renamed Phillips 66. Frank Phillips, the founder of the Phillips 66 Oil company, was a man who knew how to use his courage and initiative and great administrative ability to create industry and wealth in Oklahoma leaving a legacy in the oil company that bears his name that will always be a monument to his memory. But there is another Oklahoma oil pioneer who was equally important in developing the oil industry and bringing prosperity and advancement to Northern Oklahoma and that man was EW Marland. EW Marland pioneered the use of geological techniques in the oil industry and was years ahead of his time as an employer providing housing, loans, medical care, and other benefits for thousands of employees who worked at his refineries and pipelines but Marland lost everything to the powerful JP Morgan banking interests - even losing his name on the oil company that he founded in Ponca City. It is altogether fitting and proper that Phillips 66 honor the heritage of oil development in Northern Oklahoma by recognizing Frank Phillips and EW Marland. The executives of Phillip 66 have honored the memory of Frank Phillips by choosing to name their new company for Phillips. We think Phillips 66 should honor the legacy of oil pioneer EW Marland by naming their refinery in Ponca City for Marland, the man who started the refinery and brought advancement and development to North Central Oklahoma. It would mean a great deal to the residents of Ponca City for Phillips 66 to acknowledge the history and heritage of the oil industry in Oklahoma by honoring these two great oil pioneers, Frank Phillips and EW Marland. Renaming the refinery in Ponca City the "EW Marland Refinery" will serve as a symbol going forward of the partnership between the oil industry and the citizens of North Central Oklahoma that honors the legacy of these two great oil pioneers.[79]
An advertisement by Phillips 66 announcing its "intent on continually earning the trust of the communities we serve and operating with the highest levels of integrity" appeared in the Ponca City News on May 1, 2012.[80] An advertisement congratulating Phillips 66 on its creation and asking Phillips 66 to "honor the legacy of EW Marland" appeared in the Ponca City News on May 1, 2012.[81]
Conclusions
Note: This section of the report contains our conclusions based on the documented facts that are presented in the rest of the report. All responsibility for the conclusions are ours. If you have any additional information or insights that you would like to see added to this report please contact Hugh Pickens by email at hughpickens AT gmail DOT com.
Our analysis of the information publicly available on Phillips 66 leads us to the following conclusions:
Positives
- The Refining and Marketing Business Segment will be more important to Phillips 66 than it was to ConocoPhillips.
- The Refinery in Ponca City will be more important to Phillips 66 than it was to ConocoPhillips.
Negatives
- The Refining and Marketing Business Segment is the least profitable Business Segment and will be de-emphasized with unprofitable refineries closed or sold off.
- There will be a reduction in Capital Allocation to the Refining and Marketing Business Segment.
- The Refinery in Ponca City is unlikely to be closed or sold In the medium term as margins have been strong in the Mid-Continent Segment and are expected to remain high for the next three to five years.
Refinery and Marketing Segment will be More Important to Phillips 66 than it was to ConocoPhillips
Based on the earnings contribution of the Refining and Marketing business segment, it is possible to estimate the relative importance of the segment to the overall business of both ConocoPhillips and Phillips 66. For Q1 2012 Exploration and Production (E&P) had $2,548M in earnings, Midstream was $93M, Chemicals was $218M, and finally Refining and Marketing was $452M. The total earnings for ConocoPhillips is $3,310M of which R&M's contribution was 13.7%. Considering only the three business segments that will be moving over to Phillips 66, the total earnings were $763M of which the same R&M's contribution was 59.2%. In other words, relatively speaking the R&M business segment is moving over from a small fish in a big pond (ConocoPhillips) to a big fish in a small pond (Phillips 66). The same earnings contribution from the Refining and Marketing Business Segment is 4.3 times as important to Phillips 66 as it was to ConocoPhillips.[82]
The Refinery in Ponca City will be More Important to Phillips 66 than it was to ConocoPhillips
ConocoPhillips does not break out earnings numbers to each refinery. However it is possible to make an estimate of the contribution of Ponca City's refinery to the overall Refinery and Marketing segment by looking at the production of the refineries. According to Garland's presention to financial analysts on April 9, 2012, although ConocoPhillips has reduced throughput refining capacity about 450,000 barrels a day over the past three years, in 2011 it stood at about 2.2 Million barrels per day. According to ConocoPhillips figures, the Ponca City refinery has a crude oil processing capacity of 187,000 barrels per day.[83] In terms of throughput capacity, Ponca City provides 8.5 per cent of Phillips 66 production. From a business standpoint, what is important is the earnings contribution. The Ponca City refinery is part of the Mid-Continent segment with about 21% of Phillips 66 capacity and margins have been very strong in this area so the contribution to earnings would exceed the contribution to throughput. We estimate that the Ponca City refinery contributes about 10% of the earnings to the Refining portion of the Refining and Marketing business segment.
R&M Segment is the Least Profitable Business Segment and Will be De-Emphasized
The three operating segments of Phillips 66 have very different ROCE's. In 2011 the ROCE of the Refining and Marketing segment was 12%, the ROCE of the Midstream segment was 30%, and the ROCE of the Chemical segment was 28%. Because the ROCE of the Chemical segments and the Midstream segments is so much higher than the ROCE in the R&M segment, Garland plans to plans to aggressively grow the Chemicals and Midstream segments of Phillips 66 and de-emphasize the Refining and Marketing segments of the company.
According to information available on April 17, 2012, Phillips 66 plans to aggressively grow the Chemicals and Midstream segments of the new company and de-emphasize the Refining and Marketing segment of the company. The Refinery and Marketing segment of the company is the lowest profit margin segment of the company and Phillips 66 plans on selling and shutting down unprofitable assets in this segment.
There will be a Reduction in Capital Allocation to R&M Segment
Phillips 66 plans a major change in this allocation. "Long-term we have a vision that about 50% of our capital employed will be directed towards the R&M segment (down from 84% in 2011). And the other 50% will be directed towards Midstream and Chemicals." This is a 40% reduction in capital allocation from from 84% of capital allocated to the R&M segment in 2011. The conclusion we draw is that there will be less capital investment and improvements in the existing Phillips 66 refineries in general and in the refinery in Ponca City in particular.
Refinery in Ponca City Unlikely to be Closed or Sold in the Near Term as Margins Have Been Strong in the Mid-Continent Segment
The Ponca City refinery is part of the Mid-Continent segment with about 21% of Phillips 66 capacity and margins have been very strong in this area. The conclusion we draw is that although Phillips 66 plans to sell or close down some of their less profitable refineries, it is unlikely that any of those in the mid-continent region would be closed.
Phillips 66′s most profitable refineries of the past couple years are in the Mid-Continent including the Sweeney refinery, Ponca City, Wood River and Billings. The reason for their high profitability has been the glut of crude oil pouring into the region from newly tapped shale oil plays like North Dakota’s Bakken. In an April conference call with analysts, Garland said the company had been generating $90 million in annual net income for every dollar of WTI-Brent price differential that it could capture for its refineries. However, this opportunity is not going to last long term because there will soon be plenty of new options for getting crude out of Cushing and Garland agrees that the price differential will collapse. “Over three to five years those wide differentials that we’re seeing in the Midcon will collapse to the transportation differential,” he told me. “So more like $3 to $5 a barrel. It’s not going to be $20 forever.”[32]
What Does the Creation of Phillips 66 Mean to Ponca City?
The refinery in Ponca City will be more important to Phillips 66 than it was to ConocoPhillips - 4.3 times as important - because the Refining and Marketing business segment will be a larger part of Phillips 66, a smaller company, focused on downstream operations, than it ever was to ConocoPhillips, where the Refining and Marketing business segment was only a small part of the company, dwarfed by the exploration side of the house. Since the refinery in Ponca City is part of the more profitable mid-continent segment (ConocoPhillips does not break out earnings by refinery.) the refinery is more important to the profitability of Phillips 66 than than it was to ConocoPhillips. Because of these two factors the refinery in Ponca City can expect more attention at the corporate level. The refinery can expect more visits from Phillips 66 upper management. The refinery can expect that technical and community concerns will be listened to with more attention.
Although Phillips 66 is already moving to sell two of its least profitable refineries, it is unlikely that Phillips 66 will move quickly to sell the refinery in Ponca City because of its complexity and the high profitability of the mid-continent segment which is expected to last another three to five years. On the downside, although the Refining and Marketing Business segment of Philips 66 makes the largest overall contribution to the company's earnings, in terms of percentage profitability it is the least profitable business segment with only a 10% COBE so Phillips 66 has made a decision to de-emphasize Refining and Marketing and increase the investment in the Chemical and Midstream business segments with higher COBE's which is also where the new CEO, Greg Garland has his background. Because of this factor, the refinery in Ponca City can expect that there will be relatively little interest at the corporate level at expanding the refinery or making new investments in the refinery.
External Links
- ConocoPhillips. "Creating Two Leading Energy Companies" July 14, 2011.
- ConocoPhillips Analyst Meeting - Color Slides "ConocoPhillips Conference Call to Discuss its Pursuing Plan to Separate Into Two Stand-Alone, Publicly Traded Companies" July 14, 2011.
- Slide Presentation for Phillips 66 Investor Update
- Transcript of Phillips 66 Analyst Update
- Seeking Alpha. "ConocoPhillips' CEO Hosts Phillips 66 Analyst Update Conference Call" April 9, 2012
- ConocoPhillips Worldwide Refining
- Honor the Legacy of EW Marland
References
- ↑ 1.0 1.1 Conoco Inc. Company History at Conoco Phillips company website (retrieved March 2, 2010).
- ↑ Wikipedia. "Marland Oil Company"
- ↑ Petroleum Age. "Marland Plans Plant Additions to Cost about $1,600,000" 1922.
- ↑ Wikipedia. "Marland Oil Company"
- ↑ Wikipedia. "Ponca City,Oklahoma"
- ↑ The Durant Daily Democrat. "An Oil Company Town, Ponca City Eyeing Tourism Industry" by Robert V. Peterson. November 14, 2982.
- ↑ NY Times. "Refinery's Neighbors Count Sorrows, and Riches" by Roberto Suro. April 4, 1990.
- ↑ NY Times. "Ponca City Journal; Oil Town Is Consumed by Sludge" by Lisa Belkin. May 13, 2988
- ↑ International Economic Development Council. "Case: Diversifying into Knowledge-based Industries in Ponca City, Oklahoma after the Departure of Conoco Phillips" March, 2010
- ↑ NY Times. "DuPont to Spin Off 20% of Conoco, the Rest to Be Sold Later" by Claudia H. Deutsch. May 12, 1998.
- ↑ ConocoPhillips. "Company Independence: 1997-2002 "
- ↑ Petroleum News. "Conoco and Phillips agree to merger of equals, Mackenzie gasline priority for Conoco Chairman Archie Dunham prior to merger" November 18, 2001.
- ↑ Wikipedia. "ConocoPhillips" retrieved April 23, 2012.
- ↑ Pittsburgh Post-Gazette. "Analysts: Conoco-Phillips merger about survival" by Alan Clenndenning. November 20, 2001.
- ↑ BusinessWeek. "ConocoPhillips: The Making Of An Oil Major" by By Mark Morrison. December 12, 2005.
- ↑ 16.0 16.1 16.2 16.3 16.4 16.5 16.6 ConocoPhillips Final Transcript "ConocoPhillips Conference Call to Discuss its Pursuing Plan to Separate Into Two Stand-Alone, Publicly Traded Companies" July 14, 2011.
- ↑ 17.0 17.1 17.2 17.3 17.4 17.5 17.6 ConocoPhillips. "Creating Two Leading Energy Companies" July 14, 2011.
- ↑ KOCO. "Phillips-Conoco Merger Stuns Bartlesville" November 19, 2001.
- ↑ Victoria Advocate. "ConocoPhillips to close Ponca City demonstration plant" October 21, 2004.
- ↑ Tulsa World. "ConocoPhillips jobs in jeopardy" by Rod Walton. November 8, 2008.
- ↑ Tulsa World. "Ponca City losing hundreds of ConocoPhillips jobs" February 27, 2009.
- ↑ Business Week. "Okla. towns eye split of ConocoPhillips operations" by Murray Evans. July 14, 2011.
- ↑ The Ponca City News. "City Leaders React To Announcement" by Beverly Bryant. February 17, 2009.
- ↑ Tulsa World. "Losing 'the company' changes Ponca City" June 28, 2009.
- ↑ KOCO. "Ponca City Frets Conoco Job Cuts" November 7, 2008.
- ↑ CEO World. "U.S. oil major ConocoPhillips plans to divest $10bn in assets, cut spending" by Hendrik L Clarke. October 7, 2009.
- ↑ Seeking Alpha. "ConocoPhillips Q3 2009 Earnings Conference Call" October 28, 2009.
- ↑ Facebook. "ConocoPhillips Update Forum" May 21, 2010.
- ↑ Tulsa World. "ConocoPhillips sells assets, slows pace of growth
- ↑ Bartlesville Examiner-Enterprise. "Update on strategy" May 23, 2010.
- ↑ Price College of Business. "John Carrig Speaks to Students, Alumni and Faculty as part of the Distinguished Speaker Series" Februaru 27, 2009.
- ↑ 32.0 32.1 32.2 32.3 32.4 32.5 Forbes Magazine. "As ConocoPhillips Spins Off Refining Assets, Think Twice Before Buying The New Phillips 66" by Christopher Helman. April 30, 2012.
- ↑ 33.0 33.1 33.2 33.3 33.4 33.5 Houston Chronicle. "ConocoPhillips split becomes official as company 'shrinks to grow'" by Simone Sebastian and Emily Pickrell. April 30, 2012.
- ↑ Tulsa World. "ConocoPhillips streamlines with Phillips 66 refining side spinoff" by Rob Walton. "April 28, 2012.
- ↑ 35.0 35.1 35.2 MarketWatch. "Phillips 66 Debuts as Advantaged Downstream Company" May 1, 2012.
- ↑ 36.0 36.1 36.2 Tulsa World "ConocoPhillips to call its downstream firm Phillips 66" by Rod Walton. November 11, 2011.
- ↑ 37.0 37.1 ConocoPhillips. "ConocoPhillips’ Board of Directors Approves Spin-off of Phillips 66" April 4, 2012
- ↑ Convenience Store News. "ConocoPhillips CFO: Phillips 66 Spinoff Will Definitely Be on May 1" by Brian Berk. April 23, 2012.
- ↑ CSPNet. "Phillips 66 Rises Again" November 11, 2012.
- ↑ ConocoPhillips "FAQs:Why was the name Phillips 66 chosen?" retrieved April 26, 2012.
- ↑ 41.0 41.1 Houston Chronicle. "Spun-off refiner gets Phillips 66 name" by Simone Sebastian. November 10, 2011.
- ↑ Phillips 66 Web Site. "Our History" retrieved April 26, 2012.
- ↑ 43.0 43.1 43.2 43.3 Bartlesville Examiner-Enterprise. "ConocoPhillips, Phillips 66 embark on a new future" April 29, 2012.
- ↑ 44.0 44.1 Houston Chronicle. "Oil giant's profit falls before spinoff" by Simone Sebastian and Emily Pickrell. April 23, 2012.
- ↑ Tul;sa World. "10 years after merger, ConocoPhillips to split" by Rod Walton. April 28, 2012.
- ↑ ConocoPhillips. "James J. Mulva" retrieved April 23, 2012.
- ↑ Tul;sa World. "10 years after merger, ConocoPhillips to split" by Rod Walton. April 28, 2012.
- ↑ ConocoPhillips "Greg C. Garland" retrieved April 23, 2012.
- ↑ [http://www.pr.com/company-profile/employees-biography/1202-1052 ConocoPhillips. "John E. Lowe Executive VP, Planning, Strategy & Corporate Affairs" retrieved April 28, 2012.]
- ↑ CBS News "Phillips 66 Names Board of Directors" April 16, 2012.
- ↑ Marketwatch. "ConocoPhillips Announces Future Board of Directors for Phillips 66" April 16, 2012.
- ↑ R&D Magazine. "Phillips 66 to replace Supervalu in S&P 500" April 23, 2010
- ↑ MarketWatch. "Phillips 66 Rings Opening Bell at New York Stock Exchange" May 2, 2012.
- ↑ Houston Business Journal. "Phillips 66 to build new Houston headquarters" March 20, 2012.
- ↑ 55.00 55.01 55.02 55.03 55.04 55.05 55.06 55.07 55.08 55.09 55.10 55.11 55.12 55.13 55.14 ConocoPhillips. "Slide Presentation for Phillips 66 Investor Update" April 9, 2012
- ↑ 56.00 56.01 56.02 56.03 56.04 56.05 56.06 56.07 56.08 56.09 56.10 56.11 56.12 56.13 56.14 ConocoPhillips. "Phillips 66 Analyst Update Transcript of Phillips 66 Analyst Update" April 9, 2012
- ↑ 57.00 57.01 57.02 57.03 57.04 57.05 57.06 57.07 57.08 57.09 57.10 57.11 57.12 57.13 57.14 Seeking Alpha. "ConocoPhillips' CEO Hosts Phillips 66 Analyst Update Conference Call" April 9, 2012
- ↑ Wikipedia. "Return on capital employed" retrieved Arpil 23, 2012.
- ↑ The Motley Fool. "This New Refining Stock Could Be a Winner" by Isac Simon. April 5, 2012.
- ↑ Wall Street Daily. "The ConocoPhillips Spin-Off: A Profit Opportunity Three Years in the Making" by Jason Simpkins. April 25, 2012
- ↑ Bartlesvile Examiner-Enterprise. "ConocoPhillips, Phillips 66 have deep roots in Bartlesville" by Ryan Lance and Greg Garland. May 1,2012.
- ↑ ConocoPhillips. "Worldwide Refining"
- ↑ Reuters. "Phillips 66 aims to run more shale oil" by Kristen Hays. May 1, 2012.
- ↑ Houston Chronicle. "Phillips 66's route to focus on refining, pipelines" by Simone Sebastian. May 1, 2012.
- ↑ Businesswire. "ConocoPhillips Reports First-Quarter Earnings of $2.9 Billion or $2.27 Per Share" April 23, 2012
- ↑ MarketWatch. "Phillips 66 Sells Trainer, Pa., Refinery to Delta Air Lines" April 30, 2012.
- ↑ Forbes Magazine. "Delta Pulls The Trigger On Purchase Of Philly Refinery From Phillips 66" by Steve Schaefer. May 1, 2012.
- ↑ Reuters. "Conoco spinoff's CEO has no comment on Trainer sale" April 9, 2012.
- ↑ Philadelphia Inquirer. "Delta bid for Trainer refinery gaining momentum" by Andrew Maykuth. April 17, 2012.
- ↑ Reuters. "Phillips 66 aims to run more shale oil" by Kristen Hays. May 1, 2012.
- ↑ Reuters. "Phillips 66 aims to run more shale oil" by Kristen Hays. May 1, 2012.
- ↑ MarketWatch. "Phillips 66 Rings Opening Bell at New York Stock Exchange" May 2, 2012.
- ↑ KTVQ. "Local refinery in Billings becomes Phillips 66" by Drew Trafton. May 1,2012.
- ↑ 74.0 74.1 74.2 74.3 Tulsa World. "ConocoPhillips streamlines with Phillips 66 refining side spinoff" by Rod Walton. April 29, 2012.
- ↑ Bartlesvile Examiner-Enterprise. "ConocoPhillips, Phillips 66 have deep roots in Bartlesville" by Ryan Lance and Greg Garland. May 1,2012.
- ↑ Tulsa World. "ConocoPhillips split is deja vu for Ponca City, Bartlesville" by Rod Walton. April 29, 2012.
- ↑ The Ponca City News. "Future Phillips 66 officials visited the Ponca City site last week" March 27, 2012.
- ↑ ConocoPhillips Web Site. "Ponca City Refinery - Community Advisory Council" Retrieved April 5, 2012
- ↑ Honor EW Marland web site
- ↑ Ponca City News. Phillips 66 Advertisement. May 1, 2012.
- ↑ Ponca City News. "Honor the Legacy of EW Marland" May 1, 2012.
- ↑ BusinessWire. "ConocoPhillips Reports First-Quarter Earnings of $2.9 Billion or $2.27 Per Share" April 23, 2012.
- ↑ ConocoPhillips. "Refining"
About the Author
Hugh Pickens (Po-Hi '67) is a physicist who has explored for oil in the Amazon jungle, crossed the empty quarter of Saudi Arabia installing microwave communications systems, and built satellite control stations for NASA all over the world. In 2005 Pickens and his wife retired to his hometown of Ponca City, Oklahoma where he cultivates his square foot garden, mows 6 acres of lawn, and photographs local events at the Poncan Theatre and Ponca Playhouse.
Since 2001 Pickens has edited and published “Peace Corps Online,” serving over one million pageviews monthly. His other writing includes contributing over 1,200 stories to “Slashdot: News for Nerds,” and articles for Wikipedia, “Ponca City, We Love You”, and Peace Corps Worldwide.
Other Articles Written about Ponca City
- The Pioneer Woman Models Should Return to Ponca City] July 13, 2007
- The Pioneer Woman Models Come Home to Ponca City February 26, 2010
- President Barack Obama's Mother Grew Up in Ponca City February 6, 2009
- Standing Bear Looks to the Future
- What to See in Ponca City
- Ponca Playhouse to Present "The Broken Statue" January 17, 2012
Updates to the Web Site
This web page is frequently updated so check back periodically to see the latest information on "Phillips 66 and Ponca City." If you have any additional information or insights that you would like to see added to this report on Phillips 66 and Ponca City please contact Hugh Pickens by email at hughpickens AT gmail DOT com.
Copyright
The material in this article is licensed under under the Creative Commons under an Attribution-Noncommercial-Share Alike 2.0 Generic license. Except for short, fair use excerpts, the material on this article cannot be used for commercial purposes without permission of Hugh Pickens. Attribution for use of any material from this article must be provided to Hugh Pickens and if used on the web a link must be provided to http://hughpickens.com.
